e424b2
The
information in this preliminary prospectus supplement is not
complete and may be changed. This preliminary prospectus
supplement and the accompanying prospectus are not an offer to
sell these securities and they are not soliciting an offer to
buy these securities in any jurisdiction where the offer or sale
is not permitted.
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Filed
pursuant to Rule 424(b)(2)
Registration No. 333-164414
SUBJECT
TO COMPLETION, DATED JANUARY 20, 2010
PRELIMINARY
PROSPECTUS SUPPLEMENT
(To Prospectus dated
January 20, 2010)
$1,750,000,000
Energy
Transfer Equity, L.P.
% Senior
Notes due 2017
% Senior
Notes due 2020
We are offering
$ aggregate principal amount of
our % Senior Notes due 2017, or
2017 notes, and $ aggregate
principal amount of
our % Senior Notes due 2020,
or 2020 notes. We refer to the 2017 notes and
2020 notes, collectively, as the notes.
Interest on the
notes will accrue
from ,
2010 and will be payable semi-annually on February 28 and
August 31 of each year, beginning on August 31, 2010.
The 20 notes will mature on February 28, 2017
and the 2020 notes will mature on February 28, 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 are our
unsecured senior obligations. If we default, your right to
payment under the notes will rank equally with the right to
payment of the holders of our other current and future unsecured
senior 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.
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-15
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.
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Per
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Total
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Per
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Total
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2017
Note
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2017
Notes
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2020
Note
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2020
Notes
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Price to Public(1)
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%
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$
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%
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$
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Underwriting Discount
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%
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$
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%
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$
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Proceeds to Energy Transfer Equity, L.P. (Before Expenses)
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%
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$
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%
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$
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(1)
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Plus accrued
interest
from ,
2010, if settlement occurs after that date.
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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
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SunTrust
Robinson Humphrey
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The date of this
prospectus supplement
is ,
2010.
TABLE OF
CONTENTS
Prospectus
Supplement
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Page
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S-1
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S-15
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S-43
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S-44
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S-46
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S-48
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S-85
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S-105
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S-108
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S-110
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S-116
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S-136
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S-141
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S-143
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S-143
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A-1
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Prospectus
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About This Prospectus
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1
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Energy Transfer Equity, L.P.
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1
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Energy Transfer Partners, L.P.
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1
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Cautionary Statement Concerning Forward-Looking Statements
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2
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Risk Factors
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4
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Use of Proceeds
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4
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Ratio of Earnings to Fixed Charges
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4
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Description of Debt Securities
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5
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Plan of Distribution
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8
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Legal Matters
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9
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Experts
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9
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Where You Can Find More Information
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10
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Incorporation of Certain Documents by Reference
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10
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ABOUT
THIS PROSPECTUS SUPPLEMENT
We provide information to you about the notes in two separate
documents that offer varying levels of detail:
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the accompanying prospectus, which provides general information,
some of which may not apply to the notes; and
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this prospectus supplement, which provides a summary of the
specific terms of the notes.
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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 state 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 SECs 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 website 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:
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our Annual Report on
Form 10-K
for the year ended December 31, 2008;
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our Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2009, June 30, 2009
and September 30, 2009;
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our Current Reports on
Form 8-K
filed January 26, 2009, March 18, 2009, July 29,
2009, October 28, 2009, December 23, 2009 and
January 20, 2010; and
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all documents filed by us under Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 between the date
of this prospectus supplement and before the termination of this
offering.
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You may obtain any of the documents incorporated by reference in
this prospectus supplement or the accompanying prospectus from
the SEC through the SECs website 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 website 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:
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the ability of our subsidiary, Energy Transfer Partners, L.P.,
or ETP, to make cash distributions to us, which is dependent on
the results of operations, cash flows and financial condition of
ETP;
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the actual amount of cash distributions by ETP to us, which is
affected by the amount, if any, of cash reserves established by
the Board of Directors of the general partner of ETP and is
outside of our control;
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the amount of natural gas transported on ETPs pipelines
and gathering systems;
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the level of throughput in ETPs natural gas processing and
treating facilities;
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the fees ETP charges and the margins it realizes for its
gathering, treating, processing, storage and transportation
services;
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the prices and market demand for, and the relationship between,
natural gas and natural gas liquids, or NGLs;
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iii
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energy prices generally;
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the prices of natural gas and propane compared to the price of
alternative and competing fuels;
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the general level of petroleum product demand and the
availability and price of propane supplies;
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the level of domestic oil, propane and natural gas production;
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the availability of imported oil and natural gas;
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the ability to obtain adequate supplies of propane for retail
sale in the event of an interruption in supply or transportation
and the availability of capacity to transport propane to market
areas;
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actions taken by foreign oil and gas producing nations;
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the political and economic stability of petroleum producing
nations;
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the effect of weather conditions on demand for oil, natural gas
and propane;
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availability of local, intrastate and interstate transportation
systems;
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the continued ability to find and contract for new sources of
natural gas supply;
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availability and marketing of competitive fuels;
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the impact of energy conservation efforts;
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energy efficiencies and technological trends;
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governmental regulation and taxation;
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changes to, and the application of, regulation of tariff rates
and operational requirements related to ETPs interstate
and intrastate pipelines;
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hazards or operating risks incidental to the gathering,
treating, processing and transporting of natural gas and NGLs or
to the transporting, storing and distributing of propane that
may not be fully covered by insurance;
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the maturity of the propane industry and competition from other
propane distributors;
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competition from other midstream companies, interstate pipeline
companies and propane distribution companies;
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loss of key personnel;
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loss of key natural gas producers or the providers of
fractionation services;
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reductions in the capacity or allocations of third-party
pipelines that connect with ETPs pipelines and facilities;
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the effectiveness of risk-management policies and procedures and
the ability of ETPs liquids marketing counterparties to
satisfy their financial commitments;
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the nonpayment or nonperformance by ETPs customers;
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regulatory, environmental, political and legal uncertainties
that may affect the timing and cost of ETPs internal
growth projects, such as ETPs construction of additional
pipeline systems;
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risks associated with the construction of new pipelines and
treating and processing facilities or additions to ETPs
existing pipelines and facilities, including difficulties in
obtaining permits and
rights-of-way
or other regulatory approvals and the performance by third-party
contractors;
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the availability and cost of capital and ETPs ability to
access certain capital sources;
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the further deterioration of the credit and capital markets;
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iv
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the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to ETPs
financial results and to successfully integrate acquired
businesses;
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changes in laws and regulations to which we are subject,
including tax, environmental, transportation and employment
regulations or new interpretations by regulatory agencies
concerning such laws and regulations; and
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the costs and effects of legal and administrative proceedings.
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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.
v
PROSPECTUS
SUPPLEMENT SUMMARY
The following is a summary of some of the information
contained in this prospectus supplement. It is not complete and
may not contain all the information that is important to you. To
understand this offering fully, you should read carefully the
entire prospectus supplement, the accompanying prospectus, the
documents incorporated by reference and the other documents to
which we refer herein, including the risk factors beginning on
page S-15
and the financial statements incorporated by reference in this
prospectus supplement. Unless the context requires otherwise,
references to we, us, our,
and ETE shall mean Energy Transfer Equity, L.P. and
its consolidated subsidiaries, which include Energy Transfer
Partners, L.P. (or ETP), Energy Transfer Partners GP, L.P. (or
ETP GP), the general partner of ETP, and ETP GPs general
partner, Energy Transfer Partners, L.L.C. (or ETP LLC).
We are a publicly traded Delaware limited partnership (NYSE:
ETE) that directly and indirectly owns equity interests in ETP.
We do not separately conduct any other business other than our
ownership of interests in ETP. ETP is a publicly traded limited
partnership (NYSE: ETP) that owns and operates a diversified
portfolio of energy assets. ETPs natural gas operations
include intrastate natural gas gathering and transportation
pipelines, an interstate pipeline, natural gas treating and
processing assets located in Texas, New Mexico, Arizona,
Louisiana, Utah and Colorado, and three natural gas storage
facilities located in Texas. These assets include more than
17,500 miles of pipeline in service. ETP also has a 50%
interest in joint ventures with approximately 500 miles of
interstate pipeline in service. ETPs intrastate and
interstate pipeline systems transport natural gas from several
significant natural gas producing areas, including the Barnett
Shale in the Fort Worth Basin in north Texas, the Bossier
Sands in east Texas, the Permian Basin in west Texas and New
Mexico, the San Juan Basin in New Mexico and other
producing areas in south Texas and central Texas. ETPs
gathering and processing operations are conducted in many of
these same producing areas as well as in the Piceance and Uinta
Basins in Colorado and Utah. ETP is also one of the three
largest retail marketers of propane in the United States,
serving more than one million customers across the country.
The following map depicts the major components of ETPs
natural gas operations:
S-1
Our
Interests in ETP
ETEs equity interests in ETP consist of the following:
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an approximate 1.8% general partner interest, which ETE holds
through its ownership interests in ETP GP;
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100% of the incentive distribution rights in ETP, which ETE
holds through its ownership interests in ETP GP; and
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approximately 62.5 million ETP common units, all of which
are held directly by ETE.
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The ETP incentive distribution rights entitle ETE, as the
indirect holder of those rights, to receive the following
percentages of cash distributed by ETP as the following target
cash distribution levels are reached:
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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;
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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
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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.
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On November 16, 2009, ETP distributed $0.89375 per common
unit for the quarter ended September 30, 2009 (or $3.575 on
an annualized basis). This quarterly distribution resulted in a
$149.0 million distribution to ETE, of which
$4.9 million related to our general partner interest in
ETP, $88.2 million related to our incentive distribution
rights, and $55.9 million related to the approximately
62.5 million common units of ETP owned by us. As of
December 31, 2009, ETP had a total of 179.3 million
common units outstanding. The aggregate amount of ETPs
cash distributions to us in respect of any given quarter will
vary depending on several factors, including ETPs total
outstanding partnership interests on the record date for the
distribution, the aggregate cash distributions made by ETP and
the amount of ETPs partnership interests ETE owns. In
addition, the level of distributions ETE receives may be
affected by the various risks associated with an investment in
ETE and the underlying business of ETP. See Risk
Factors beginning on
page S-15.
Cash
Distributions Received by Energy Transfer Equity from Energy
Transfer Partners
Currently, our only cash-generating assets are our direct and
indirect partnership interests in ETP. These ETP interests
consist of all of ETPs general partner interest, 100% of
ETPs incentive distribution rights and 62,500,797 ETP
common units held by us.
The total amount of distributions we received from ETP relating
to our limited partner interests, general partner interest and
incentive distribution rights for the periods ended as noted
below is as follows (in thousands):
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Nine Months
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Four Months
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Ended
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Year Ended
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Ended
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Year Ended
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September 30,
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December 31,
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December 31,
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August 31,
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2009
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2008
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2008
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2007
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2007
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Limited Partner Interests
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$
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167,580
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$
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166,018
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$
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221,878
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$
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70,313
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$
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199,221
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General Partner Interest
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14,588
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12,740
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17,322
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5,110
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13,676
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Incentive Distribution Rights
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255,808
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219,298
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298,575
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85,775
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222,353
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Total distributions received from ETP(1)
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$
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437,976
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$
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398,056
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$
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537,775
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$
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161,198
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$
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435,250
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(1) |
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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. |
ETEs primary cash requirements are for general and
administrative expenses, debt service and distributions to its
partners. ETEs assets and liabilities are not available to
satisfy the debts and other obligations of ETP or its
subsidiaries.
S-2
ETPs
Business
ETP is one of the three largest publicly traded limited
partnerships in the United States in terms of equity market
capitalization (approximately $8.6 billion as of
January 15, 2010). ETP had $11.3 billion of total
assets as of September 30, 2009. ETP groups its operations
into four segments as outlined below.
Intrastate
Transportation and Storage Operations
ETP owns and operates nearly 8,000 miles of intrastate
natural gas transportation pipelines and three natural gas
storage facilities. ETP owns the largest intrastate pipeline
system in the United States. ETPs intrastate pipeline
system interconnects to many major consumption areas in the
United States. ETPs intrastate transportation and storage
segment focuses on the transportation of natural gas from
various natural gas producing areas to major natural gas
consuming markets through connections with other pipeline
systems. ETPs intrastate natural gas pipeline system has
an aggregate throughput capacity of approximately
14.3 billion cubic feet per day, or Bcf/d, of natural gas.
For the nine months ended September 30, 2009, ETP
transported an average of 12.8 Bcf/d of natural gas through
its intrastate natural gas pipeline system. ETP also provides
natural gas storage services for third parties for which it
charges storage fees as well as injection and withdrawal fees
from the use of its three natural gas storage facilities.
ETPs storage facilities have an aggregate working gas
capacity of approximately 74.4 Bcf. In addition to its
natural gas storage services, ETP utilizes its Bammel gas
storage facility to engage in natural gas storage transactions
in which it seeks to find and profit from pricing differences
that occur over time. These transactions typically involve a
purchase of physical natural gas that is injected into its
storage facilities and a related sale of natural gas pursuant to
financial futures contracts at a price sufficient to cover its
natural gas purchase price and related carrying costs and
provide for a gross profit margin.
Based primarily on the increased drilling activities and
increased natural gas production in the Barnett Shale in north
Texas and the Bossier Sands in east Texas, ETP has pursued a
significant expansion of its natural gas pipeline system in
order to provide greater transportation capacity from these
natural gas supply areas to markets for natural gas. This
expansion initiative, which has resulted in the construction of
approximately 900 miles of large diameter pipeline ranging
from 20 inches to 42 inches in diameter with
approximately 7.6 Bcf/d of natural gas transportation
capacity, includes the following completed pipeline construction
projects:
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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 natural gas deliverability at the Carthage Hub to
more than 2.0 Bcf/d.
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In April 2008, ETP completed its
150-mile
Southeast Bossier
42-inch
diameter natural gas pipeline, which we refer to as the
Southeast Bossier pipeline. This pipeline connects ETPs
42-inch
diameter Cleburne to Carthage pipeline and its
30-inch
diameter East Texas pipeline to its
30-inch
diameter Texoma pipeline. The Southeast Bossier pipeline has an
initial throughput capacity of 900 million cubic feet per
day, or
MMcf/d,
which can be increased to 1.3 Bcf/d with the addition of
compression. The Southeast Bossier pipeline increases ETPs
takeaway capacity from the Barnett Shale and Bossier Sands and
provides increased market access for natural gas produced in
these areas.
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In July 2008, ETP completed its
36-inch
diameter 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 ETPs
Houston Pipe Line system near Paris, Texas.
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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
diameter 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.
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In August 2008, ETP completed the first segment of its
36-inch
diameter 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.
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In January 2009, ETP completed its Southern Shale natural gas
pipeline project, which consists of 31 miles of
36-inch
diameter 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.
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In January 2009, ETP completed its
36-inch
diameter 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.
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In February 2009, ETP completed its
56-mile Katy
Expansion pipeline project. This
36-inch
diameter expansion project increases the capacity of its
existing ETC Katy natural gas pipeline in southeast Texas by
more than
400 MMcf/d.
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In August 2009, ETP completed its Texas Independence Pipeline,
which consists of approximately 150 miles of
42-inch
diameter pipeline originating near Maypearl, Texas and ending
near Henderson, Texas. This pipeline connects ETPs ET Fuel
System and North Texas System with its East Texas pipeline. The
Texas Independence Pipeline expands ETPs ET Fuel
Systems 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.
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These pipeline projects are supported by principally fee-based
contracts for periods ranging from five to 15 years.
ETPs intrastate transportation and storage operations
accounted for approximately 59% of its total consolidated
operating income for the year ended August 31, 2007,
approximately 65% of its total consolidated operating income for
the year ended December 31, 2008 and approximately 54% of
its total consolidated operating income for the nine months
ended September 30, 2009.
Interstate
Transportation Operations
ETP owns and operates the Transwestern pipeline through its
subsidiary, Transwestern Pipeline Company, LLC, which we refer
to as Transwestern. The Transwestern pipeline is an open-access
natural gas interstate pipeline extending from the gas producing
regions of west Texas, eastern and northwest New Mexico, and
southern Colorado primarily to pipeline interconnects off the
east end of its system and to pipeline interconnects at the
California border. Including the recently completed projects
described below, the Transwestern pipeline comprises
approximately 2,700 miles of pipeline with a capacity of
2.1 Bcf/d. The Transwestern pipeline has access to three
significant gas basins: the Permian Basin in west Texas and
eastern New Mexico; the San Juan Basin in northwest New
Mexico and southern Colorado; and the Anadarko Basin in the
Texas and Oklahoma panhandle. Natural gas sources from the
San Juan Basin and surrounding producing areas can be
delivered eastward to Texas intrastate and mid-continent
connecting pipelines and natural gas market hubs as well as
westward to markets like Arizona, Nevada and California.
Transwesterns customers include local distribution
companies, producers, marketers, electric power generators and
industrial end-users.
During 2007, ETP initiated the Phoenix pipeline expansion
project, consisting of 260 miles of
42-inch and
36-inch
diameter pipeline lateral, with a throughput capacity of
500 MMcf/d,
connecting the Phoenix area to Transwesterns existing
mainline at Ash Fork, Arizona. This lateral pipeline was
completed in February 2009.
During the third quarter of 2008, ETP completed the
San Juan Loop pipeline, a
26-mile loop
that provides an additional
375 MMcf/d
of capacity to Transwesterns existing San Juan
lateral. This expansion project supports the Phoenix project by
providing additional throughput capacity from the San Juan
Basin natural gas producing area to Transwesterns primary
transmission pipeline to supply natural gas for the Phoenix
project pipeline.
ETPs interstate pipeline segment also includes its
development of the Midcontinent Express Pipeline with Kinder
Morgan Energy Partners, L.P., or KMP. The Midcontinent Express
Pipeline is an approximately
500-mile
interstate natural gas pipeline that originates near Bennington,
Oklahoma, routes through Perryville, Louisiana, and terminates
at an interconnect with Transcontinental Gas Pipe Line
Corporations, or Transcos,
S-4
interstate natural gas pipeline in Butler, Alabama.
Transcos pipeline provides producers in the Barnett Shale,
Bossier Sands, the Fayetteville Shale in Arkansas and the
Woodford/Caney Shale in Oklahoma access to the significant
natural gas markets in the midwest, northeast, mid-Atlantic and
southeast portions of the United States. The Midcontinent
Express Pipeline consists of 266 miles of
42-inch
diameter pipeline, 201 miles of
36-inch
diameter pipeline and 40 miles of
30-inch
diameter pipeline and has multiple receipt and delivery
interconnections. The first zone of the pipeline, from
Bennington, Oklahoma to Perryville, Louisiana, was placed in
service in April 2009, and the second zone of the pipeline, from
Perryville, Louisiana to Butler, Alabama, was placed in service
in August 2009. The first zone of the pipeline has an initial
design capacity of 1.5 Bcf/d (taking into account the
planned addition of compression by June 2010) and the
second zone of the pipeline has an initial design capacity of
1.2 Bcf/d. Midcontinent Express Pipeline, LLC, or MEP, the
entity developing this pipeline, has received firm
transportation commitments from customers for the full
throughput design capacity for periods ranging from five to
10 years. MEP has also received long-term firm
transportation commitments from customers for a 0.3 Bcf/d
planned expansion of the pipeline capacity, through additional
compression, which is expected to be completed by July 2010.
In October 2008, ETP entered into a 50/50 joint venture with KMP
for the development of the Fayetteville Express Pipeline, an
approximately
187-mile,
42-inch
diameter pipeline that will originate in Conway County,
Arkansas, continue eastward through White County, Arkansas and
terminate at an interconnect with Trunkline Gas Company in
Quitman County, Mississippi. In December 2009, Fayetteville
Express Pipeline, LLC, or FEP, the entity formed to own and
operate this pipeline, received approval of its application for
Federal Energy Regulatory Commission, or FERC, authority to
construct and operate this pipeline. The pipeline is expected to
have an initial capacity of 2.0 Bcf/d. On December 17,
2009, the FERC issued an order granting FEP authorization to
construct and operate the pipeline, subject to certain
conditions, and FEP accepted the FERCs certificate
authorization on December 18, 2009. Subject to possible
rehearing and judicial review, the pipeline is expected to be in
service by late 2010. FEP has secured binding
10-year
commitments for transportation of gas volumes with energy
equivalents totaling 1.8 Bcf/d. The new pipeline will
interconnect with Natural Gas Pipeline Company of America, or
NGPL, in White County, Arkansas, Texas Gas Transmission in
Coahoma County, Mississippi, and ANR Pipeline Company in Quitman
County, Mississippi. NGPL is operated and partially owned by
Kinder Morgan, Inc., which owns the general partner of KMP.
In January 2009, ETP announced that it had entered into an
agreement with a wholly owned subsidiary of Chesapeake Energy
Corporation, or Chesapeake, to construct a
178-mile,
42-inch
diameter interstate natural gas pipeline, which we refer to as
the Tiger Pipeline. The pipeline will connect to ETPs dual
42-inch
diameter pipeline system near Carthage, Texas, extend through
the heart of the Haynesville Shale and end near Delhi,
Louisiana, with interconnects to at least seven interstate
pipelines at various points in Louisiana. The Tiger Pipeline is
anticipated to have an initial throughput capacity of
2.0 Bcf/d, which capacity may be increased up to
2.4 Bcf/d with added compression. The agreement with
Chesapeake provides for a
15-year
commitment for firm transportation capacity of approximately
1.0 Bcf/d. ETP has also entered into agreements with EnCana
Marketing (USA), Inc., a subsidiary of EnCana Corporation, and
other shippers that provide for
10-year
commitments for firm transportation capacity on the Tiger
Pipeline equal to the full initial design capacity of
2.0 Bcf/d in the aggregate. In August 2009, ETP filed an
application for FERC authority to construct and operate this
pipeline. Pending necessary regulatory approvals, including
authorization from the FERC to construct the pipeline, the Tiger
Pipeline is expected to be in service in the first half of 2011.
ETPs interstate transportation segment accounted for
approximately 12% of its total consolidated operating income for
the year ended August 31, 2007, approximately 11% of its
total consolidated operating income for the year ended
December 31, 2008 and approximately 13% of its total
consolidated operating income for the nine months ended
September 30, 2009.
Midstream
Operations
ETP owns and operates approximately 7,000 miles of
in-service natural gas gathering pipelines, three natural gas
processing plants, 11 natural gas treating facilities, and 11
natural gas conditioning facilities. ETPs midstream
segment focuses on the gathering, compression, treating,
conditioning, processing and marketing of natural gas, and its
operations are currently concentrated in the Barnett Shale in
north Texas, the Bossier Sands
S-5
in east Texas, the Austin Chalk trend of southeast Texas, the
Permian Basin in west Texas and the Piceance and Uinta Basins in
Colorado and Utah.
ETPs midstream segment accounted for approximately 15% of
its total consolidated operating income for the year ended
August 31, 2007, approximately 14% of its total
consolidated operating income for the year ended
December 31, 2008 and approximately 13% of its total
consolidated operating income for the nine months ended
September 30, 2009.
Retail
Propane Operations
ETP is one of the three largest retail propane marketers in the
United States, serving more than one million customers across
the country. ETPs propane operations extend from coast to
coast with concentrations in the western, upper midwestern,
northeastern and southeastern regions of the United States.
ETPs propane business has grown primarily through
acquisitions of retail propane operations and, to a lesser
extent, through internal growth.
The retail propane segment is a margin-based business in which
gross profits depend on the excess of sales price over propane
supply cost. The market price of propane is often subject to
volatile changes as a result of supply or other market
conditions over which ETP has no control.
ETPs propane business is largely seasonal and dependent
upon weather conditions in its service areas. Historically,
approximately two-thirds of ETPs retail propane volume and
substantially all of its propane-related operating income are
attributable to sales during the six-month peak-heating season
of October through March. This generally results in higher
operating revenues and net income in the propane segment during
the period from October through March of each year, and lower
operating revenues and either net losses or lower net income
during the period from April through September of each year.
Cash flow from operations is generally greatest during the
period from December to May of each year when customers pay for
propane purchased during the six-month peak-heating season.
Sales to commercial and industrial customers are much less
weather sensitive.
ETPs retail propane operations accounted for approximately
15% of its total consolidated operating income for the year
ended August 31, 2007, approximately 10% of its total
consolidated operating income for the year ended
December 31, 2008 and approximately 20% of its total
consolidated operating income for the nine months ended
September 30, 2009.
ETPs
Business Strategy
ETPs business strategy is to increase unitholder
distributions and the value of its common units. ETP believes it
has engaged, and will continue to engage, in a well-balanced
plan for growth through acquisitions, internally generated
expansion, and measures aimed at increasing the profitability of
its existing assets.
ETP intends to continue to operate as a diversified,
growth-oriented master limited partnership with a focus on
increasing the amount of cash available for distribution on each
common unit. ETP believes that by pursuing independent operating
and growth strategies for its natural gas operations and retail
propane business, it will be best positioned to achieve its
objectives.
ETP expects that acquisitions in natural gas operations will be
the primary focus of its acquisition strategy going forward as
evidenced by its acquisitions of the Transwestern pipeline and
Canyon Gathering System, although ETP also expects to continue
to pursue complementary propane acquisitions. ETP also
anticipates that its natural gas operations will provide
internal growth projects of greater scale compared to those
available in its propane business as demonstrated by its
significant number of completed natural gas pipeline projects as
well as its recently announced pipeline projects.
ETP believes that it is well-positioned to compete in both the
natural gas operations and retail propane industries based on
the following strengths:
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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.
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S-6
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ETPs experienced management team has an established
reputation as highly-effective, strategic operators within its
operating segments. In addition, ETPs 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.
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Natural
Gas Operations Business Strategies
Enhance profitability of existing assets. ETP
intends to increase the profitability of its existing asset base
by adding new volumes of natural gas under long-term producer
commitments, undertaking additional initiatives to enhance
utilization and reducing costs by improving operations.
Engage in construction and expansion
opportunities. ETP intends to leverage its
existing infrastructure and customer relationships by
constructing and expanding systems to meet new or increased
demand for midstream and transportation services.
Increase cash flow from fee-based
businesses. ETP intends to seek to increase the
percentage of its midstream business conducted with third
parties under fee-based arrangements in order to reduce its
exposure to changes in the prices of natural gas and natural gas
liquids, or NGLs.
Growth through acquisitions. ETP intends to
continue to make strategic acquisitions of midstream,
transportation and storage assets in its current areas of
operation that offer the opportunity for operational
efficiencies and the potential for increased utilization and
expansion of its existing and acquired assets.
Propane
Business Strategies
Pursue internal growth opportunities. In
addition to pursuing expansion through acquisitions, ETP has
aggressively focused on high return internal growth
opportunities at its existing customer service locations. ETP
believes that by concentrating its operations in areas
experiencing
higher-than-average
population growth, it is well positioned to achieve internal
growth by adding new customers.
Growth through complementary acquisitions. ETP
believes that its position as one of the three largest propane
marketers in the United States provides it a solid foundation to
continue its acquisition growth strategy through consolidation.
Maintain low-cost, decentralized
operations. ETP focuses on controlling costs, and
ETP attributes its low overhead costs primarily to its
decentralized structure.
Recent
Developments
ETP
Common Unit Offering
On January 11, 2010, ETP completed a public offering of
9,775,000 common units, which included 1,275,000 common units
issued pursuant to the exercise of the underwriters option
to purchase additional common units. ETP used the net proceeds
of approximately $422.9 million to repay amounts
outstanding under its $2.0 billion revolving credit
facility, which we refer to as the ETP Credit Facility, to fund
capital expenditures related to pipeline construction projects
and for general partnership purposes.
Transwestern
Senior Notes Offering
On December 9, 2009, Transwestern entered into a note
purchase agreement with the qualified investors listed therein
that provides for the private placement by Transwestern of
$175 million of 5.36% Senior Unsecured Series A
Notes due 2020 and $175 million of 5.66% Senior
Unsecured Series B Notes due 2024, which we collectively
refer to as the Transwestern Notes. The private placement was
completed on December 9, 2009. Interest on the Transwestern
Notes will accrue from December 9, 2009. Transwestern will
pay interest on the notes semi-annually on June 9 and December 9
of each year, commencing on June 9, 2010, until maturity of
the Series A Notes on December 9, 2020 and of the
Series B Notes on December 9, 2024. Transwestern used
the net proceeds from the offering to repay amounts outstanding
under an intercompany loan agreement with ETP.
S-7
ETP
Equity Distribution Program
On August 26, 2009, ETP entered into an Equity Distribution
Agreement with UBS Securities LLC, or UBS. According to the
provisions of this agreement, ETP may offer and sell from time
to time through UBS, as its sales agent, common units having an
aggregate offering price of up to $300.0 million. Sales of
the units will be made by means of ordinary brokers
transactions on the NYSE at market prices, in block transactions
or as otherwise agreed between ETP and UBS. Under the terms of
this agreement, ETP may also sell common units to UBS as
principal for its own account at a price agreed upon at the time
of sale. Any sale of common units to UBS as principal would be
pursuant to the terms of a separate agreement between ETP and
UBS. During 2009, ETP issued 2,079,593 of its common units
pursuant to this agreement. The proceeds of approximately
$89.7 million, net of commissions, were used to repay
amounts outstanding under the ETP Credit Facility.
ETP
October Common Unit Offering
On October 6, 2009, ETP completed a public offering of
6,900,000 common units, which included 900,000 common units
issued pursuant to the exercise of the underwriters option
to purchase additional common units. ETP used the net proceeds
of approximately $275.3 million to repay amounts
outstanding under the ETP Credit Facility.
FERC
Settlement Agreement
On August 26, 2009, ETP entered into a settlement agreement
with the Enforcement Staff of FERC with respect to the pending
FERC claims against ETP related to alleged manipulation of
natural gas prices in violation of FERC rules 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 will
make a $5 million payment to the federal government and
will establish a $25 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 elect to make a claim against the funds, including
existing litigation claims as well as any new claims that may be
asserted against this fund. Any unused portion of the fund shall
be paid to the United States Treasury. The administrative law
judge appointed by FERC will determine the validity of any
third-party claim against this fund. Any party who receives
money from this fund will be required to waive all claims
against ETP related to this matter. The claims of third parties
that do not elect to pursue the fund are unaffected. Pursuant to
the settlement agreement, FERC agreed that it will not make any
findings of fact or conclusions of law. In addition, the
settlement agreement specifies that ETP does not admit or
concede to FERC or any third party any actual or potential
fault, wrongdoing or liability in connection with ETPs
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.
Our
Management and Management of ETP
LE GP, LLC is our general partner. Our general partner manages
and directs all of our activities. Our officers and directors
are officers and directors of LE GP, LLC. The members of our
general partner elect our general partners Board of
Directors. The Board of Directors of our general partner has the
authority to appoint our executive officers, subject to
provisions in the limited liability company agreement of our
general partner. Pursuant to other authority, the Board of
Directors of our general partner may appoint additional
management personnel to assist in the management of our
operations and, in the event of the death, resignation or
removal of our president, to appoint a replacement.
ETP is managed by its general partner, ETP GP, which is in turn
managed by its general partner, ETP LLC. ETP LLC is ultimately
responsible for the business and operations of ETP GP and ETP.
Accordingly, the board of directors and officers of ETP LLC make
decisions on behalf of ETP. For example, the amount of
distributions paid under ETPs cash distribution policy is
subject to the determination of the board of directors of ETP
LLC, taking into consideration the terms of ETPs
partnership agreement. Nine of the 11 current directors of our
general partner also serve as directors of ETP LLC.
S-8
Our
Principal Executive Offices
Our principal executive offices are located at 3738 Oak Lawn
Avenue, Dallas, Texas 75219. Our telephone number is
(214) 981-0700.
Our website address is www.energytransfer.com. Information
contained on our website, however, does not constitute a part of
this prospectus supplement.
Organizational
Structure
The following chart depicts our organizational structure as of
the date of this prospectus supplement and September 30,
2009 debt balances, as adjusted to give effect to the issuance
of the notes and the application of the net proceeds as
described in Use of Proceeds. The ETP information
below reflects September 30, 2009 debt balances, as
adjusted for ETPs recent equity issuances and the
Transwestern senior notes offering in December 2009.
Energy
Transfer Equitys Organizational Chart
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(1) |
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Includes approximately 540,000 common units owned by management
of Energy Transfer Partners, L.P. |
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(2) |
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Includes unamortized discounts of ETP senior notes. |
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(3) |
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Does not include the outstanding debt of joint ventures MEP and
FEP. See Capitalization and Description of
Other Indebtedness. |
S-9
The
Offering
We provide the following summary solely for your convenience.
This summary is not a complete description of the notes. You
should also read the more detailed information contained
elsewhere in this prospectus supplement and, the accompanying
prospectus. For a more detailed description of the notes, see
the section entitled Description of Notes in this
prospectus supplement and the section entitled Description
of Debt Securities in the accompanying prospectus.
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Issuer |
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Energy Transfer Equity, L.P. |
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Notes Offered |
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We are offering $1,750,000,000 aggregate principal amount
of notes of the following series: |
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$ % Senior
Notes due 2017, and
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$ % Senior
Notes due 2020.
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Maturity |
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The 2017 notes will mature on February 28, 2017 and the
2020 notes will mature on February 28, 2020. |
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Interest Rate |
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Interest on the 2017 notes will accrue at the per annum rate
of % and interest on the
2020 notes will accrue at the per annum rate
of %. |
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Interest Payment Dates |
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Interest on the notes will accrue from the issue date of the
notes and be payable semi-annually on February 28 and
August 31 of each year, beginning on August 31, 2010. |
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Ranking |
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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 unsubordinated indebtedness and senior to any of
our subordinated indebtedness. |
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The notes initially will not be guaranteed by any of our
subsidiaries. However, if in the future any of our subsidiaries
guarantees or becomes a co-obligor with respect to any
indebtedness under our revolving credit facility, then such
subsidiary will also guarantee the notes on terms provided for
in the indenture. With respect to the assets of our subsidiaries
that do not guarantee the notes, including ETP, the notes will
effectively rank junior to all existing and future obligations
of those subsidiaries. As of September 30, 2009, our
subsidiaries, including ETP and its subsidiaries, had
outstanding approximately $6.2 billion of indebtedness that
would effectively rank senior to the notes with respect to the
assets of those subsidiaries. |
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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. Borrowings under our new
revolving credit facility will be secured by a substantial
portion of our assets. |
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Optional Redemption |
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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 beginning on
page S-118. |
S-10
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Covenants |
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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 and a restriction on
sale-leaseback transactions. The covenants will generally not
apply to ETP and its subsidiaries. Each covenant is subject to a
number of important exceptions, limitations and qualifications
that are described in Description of Notes under the
heading Covenants. |
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Mandatory Offer to Repurchase |
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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. |
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Use of Proceeds |
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We anticipate using approximately $124 million of the net
proceeds of this offering to repay all of the outstanding
indebtedness under our existing revolving credit facility and
approximately $1.45 billion of the net proceeds of this
offering to repay indebtedness outstanding under our term loan
facility. In addition, we anticipate using the remaining
approximately $144 million of the net proceeds of this
offering to fund a portion of the estimated cost to terminate
interest rate swap agreements relating to these outstanding
borrowings. We anticipate funding the remaining
$14.3 million of estimated costs to terminate these
interest rate swap agreements with borrowings under our new
$200 million senior secured revolving credit facility,
which we will enter into contemporaneously with the consummation
of this offering and the repayment of outstanding indebtedness
under our existing revolving credit facility. See Use of
Proceeds and Description of Other Indebtedness. |
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Governing Law |
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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. |
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Risk Factors |
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Investing in the notes involves risks. See Risk
Factors beginning on page
S-15 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. |
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Original Issue Discount |
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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.
holders 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 holders method of tax
accounting. See Certain United States Federal Income and
Estate Tax Considerations Tax Consequences to U.S.
Holders Stated Interest and OID on the Notes. |
S-11
Summary
Historical Financial Data
Currently, we have no separate operating activities apart from
those conducted by ETP. The table below under Consolidated
Financial Data reflects our consolidated operations,
including the operations of ETP and its consolidated
subsidiaries, except as indicated below. The table under
Energy Transfer Equity Unconsolidated Stand-Alone
Financial Data reflects the operations of ETE and its
subsidiaries ETP LLC and ETP GP on an unconsolidated stand-alone
basis, excluding the operations of the other subsidiaries of
ETE. References in this prospectus supplement to financial
information for ETE on a stand-alone basis refer to the
financial information for ETE on an unconsolidated stand-alone
basis without including the operations of the subsidiaries of
ETE.
In November 2007, we changed our fiscal year end from August 31
to December 31 and, in connection with such change, we have
reported financial results for a four-month transition period
ended December 31, 2007.
For periods prior to 2009, certain prior period financial
statement amounts have been reclassified to conform to the 2009
presentation. These changes had no impact on net income or total
equity, with the exception of changes to the presentation of
noncontrolling interest resulting from the adoption of
Accounting Standards Codification
810-10-65,
which resulted in (i) the reclassification of
noncontrolling (minority) interest from liabilities to a
separate component of equity in our consolidated balance sheet,
(ii) the reclassification of minority interest expense to
net income attributable to noncontrolling interest in our
consolidated statement of operations, and (iii) the
reclassification of distributions to minority interests between
cash flow from operating activities and cash flow from financing
activities in our consolidated statement of cash flows.
The selected historical financial data should be read in
conjunction with the consolidated financial statements of Energy
Transfer Equity, L.P., which are incorporated by reference into
this prospectus supplement from our Annual Report on
Form 10-K
for the year ended December 31, 2008 and our Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009, and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations. The amounts in the
tables below are in thousands.
Consolidated
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Years Ended August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrastate transportation and storage segment
|
|
$
|
1,589,298
|
|
|
$
|
4,862,641
|
|
|
$
|
5,634,604
|
|
|
$
|
1,254,401
|
|
|
$
|
3,915,932
|
|
|
$
|
5,013,224
|
|
Interstate transportation segment
|
|
|
203,349
|
|
|
|
176,663
|
|
|
|
244,224
|
|
|
|
76,000
|
|
|
|
178,663
|
|
|
|
|
|
Midstream segment
|
|
|
1,750,466
|
|
|
|
4,555,340
|
|
|
|
5,342,393
|
|
|
|
1,166,313
|
|
|
|
2,853,496
|
|
|
|
4,223,544
|
|
Eliminations
|
|
|
(540,075
|
)
|
|
|
(3,272,574
|
)
|
|
|
(3,568,065
|
)
|
|
|
(664,522
|
)
|
|
|
(1,562,199
|
)
|
|
|
(2,359,256
|
)
|
Retail propane and other retail propane related segment
|
|
|
902,471
|
|
|
|
1,162,941
|
|
|
|
1,624,010
|
|
|
|
511,258
|
|
|
|
1,284,867
|
|
|
|
879,556
|
|
Other
|
|
|
6,004
|
|
|
|
13,675
|
|
|
|
16,201
|
|
|
|
5,892
|
|
|
|
121,278
|
|
|
|
102,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,911,513
|
|
|
|
7,498,686
|
|
|
|
9,293,367
|
|
|
|
2,349,342
|
|
|
|
6,792,037
|
|
|
|
7,859,096
|
|
Gross margin
|
|
|
1,648,233
|
|
|
|
1,761,442
|
|
|
|
2,355,287
|
|
|
|
675,688
|
|
|
|
1,713,831
|
|
|
|
1,290,780
|
|
Depreciation and amortization
|
|
|
239,626
|
|
|
|
200,922
|
|
|
|
274,372
|
|
|
|
75,406
|
|
|
|
191,383
|
|
|
|
129,636
|
|
Operating income
|
|
|
744,630
|
|
|
|
846,133
|
|
|
|
1,098,903
|
|
|
|
316,651
|
|
|
|
809,336
|
|
|
|
575,540
|
|
Interest expense, net of interest capitalized
|
|
|
(341,050
|
)
|
|
|
(261,297
|
)
|
|
|
(357,541
|
)
|
|
|
(103,375
|
)
|
|
|
(279,986
|
)
|
|
|
(150,646
|
)
|
Income before income tax expense
|
|
|
461,548
|
|
|
|
625,692
|
|
|
|
683,562
|
|
|
|
192,758
|
|
|
|
563,359
|
|
|
|
433,907
|
|
Income tax expense
|
|
|
5,773
|
|
|
|
6,600
|
|
|
|
3,808
|
|
|
|
9,949
|
|
|
|
11,391
|
|
|
|
23,015
|
|
Net income attributable to noncontrolling interest
|
|
|
152,893
|
|
|
|
266,614
|
|
|
|
304,710
|
|
|
|
90,132
|
|
|
|
232,608
|
|
|
|
303,752
|
|
Net income attributable to partners
|
|
|
302,882
|
|
|
|
352,478
|
|
|
|
375,044
|
|
|
|
92,677
|
|
|
|
319,360
|
|
|
|
107,140
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
858,411
|
|
|
|
1,779,940
|
|
|
|
1,180,995
|
|
|
|
1,403,796
|
|
|
|
1,050,578
|
|
|
|
1,302,735
|
|
Total assets
|
|
|
11,684,508
|
|
|
|
11,267,924
|
|
|
|
11,069,902
|
|
|
|
9,462,094
|
|
|
|
8,183,089
|
|
|
|
5,924,141
|
|
Current liabilities
|
|
|
882,387
|
|
|
|
1,322,535
|
|
|
|
1,208,921
|
|
|
|
1,241,433
|
|
|
|
932,815
|
|
|
|
1,020,787
|
|
Long-term debt, less current maturities
|
|
|
7,740,135
|
|
|
|
7,181,710
|
|
|
|
7,190,357
|
|
|
|
5,870,106
|
|
|
|
5,198,676
|
|
|
|
3,205,646
|
|
Total equity
|
|
|
2,753,663
|
|
|
|
47,969
|
|
|
|
2,339,316
|
|
|
|
2,091,156
|
|
|
|
1,835,300
|
|
|
|
1,484,878
|
|
S-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Years Ended August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by operating activities
|
|
|
721,421
|
|
|
|
908,837
|
|
|
|
1,143,720
|
|
|
|
208,635
|
|
|
|
1,006,320
|
|
|
|
502,928
|
|
Cash flow used in investing activities
|
|
|
(1,225,719
|
)
|
|
|
(1,439,741
|
)
|
|
|
(2,015,585
|
)
|
|
|
(995,943
|
)
|
|
|
(2,158,090
|
)
|
|
|
(1,244,406
|
)
|
Cash flow provided by financing activities
|
|
|
462,467
|
|
|
|
1,100,479
|
|
|
|
907,331
|
|
|
|
766,515
|
|
|
|
1,202,916
|
|
|
|
734,223
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance (accrual basis)
|
|
|
71,766
|
|
|
|
75,931
|
|
|
|
140,966
|
|
|
|
48,998
|
|
|
|
89,226
|
|
|
|
51,826
|
|
Growth (accrual basis)
|
|
|
534,696
|
|
|
|
1,532,458
|
|
|
|
1,921,679
|
|
|
|
604,371
|
|
|
|
998,075
|
|
|
|
677,861
|
|
Acquisition
|
|
|
6,244
|
|
|
|
62,002
|
|
|
|
84,783
|
|
|
|
337,092
|
|
|
|
90,695
|
|
|
|
586,185
|
|
Energy
Transfer Equity Unconsolidated Stand-Alone Financial
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Years Ended August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates
|
|
$
|
370,195
|
|
|
$
|
441,299
|
|
|
$
|
551,835
|
|
|
$
|
168,547
|
|
|
$
|
435,247
|
|
|
$
|
204,987
|
|
Selling, general and administration expense
|
|
|
(3,608
|
)
|
|
|
(4,523
|
)
|
|
|
(6,453
|
)
|
|
|
(2,875
|
)
|
|
|
(8,496
|
)
|
|
|
(55,374
|
)
|
Interest expense
|
|
|
(56,728
|
)
|
|
|
(69,527
|
)
|
|
|
(91,822
|
)
|
|
|
(37,071
|
)
|
|
|
(104,405
|
)
|
|
|
(36,773
|
)
|
Losses on non-hedged interest rate derivatives
|
|
|
(7,954
|
)
|
|
|
(13,759
|
)
|
|
|
(77,435
|
)
|
|
|
(27,670
|
)
|
|
|
(1,952
|
)
|
|
|
|
|
Losses on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,060
|
)
|
Other, net
|
|
|
329
|
|
|
|
(993
|
)
|
|
|
(1,056
|
)
|
|
|
(8,128
|
)
|
|
|
(405
|
)
|
|
|
(638
|
)
|
Net income
|
|
$
|
302,882
|
|
|
$
|
352,478
|
|
|
$
|
375,044
|
|
|
$
|
92,677
|
|
|
$
|
319,360
|
|
|
$
|
107,140
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
1,759
|
|
|
|
100,842
|
|
|
|
684
|
|
|
|
11,694
|
|
|
|
25,783
|
|
|
|
1,899
|
|
Total assets
|
|
|
1,653,787
|
|
|
|
1,800,706
|
|
|
|
1,671,339
|
|
|
|
1,630,940
|
|
|
|
1,537,875
|
|
|
|
668,488
|
|
Current liabilities
|
|
|
74,831
|
|
|
|
39,741
|
|
|
|
61,419
|
|
|
|
27,978
|
|
|
|
10,507
|
|
|
|
5,331
|
|
Long-term debt, less current maturities
|
|
|
1,573,923
|
|
|
|
1,672,026
|
|
|
|
1,571,642
|
|
|
|
1,572,643
|
|
|
|
1,571,500
|
|
|
|
616,291
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by operating activities
|
|
$
|
349,402
|
|
|
$
|
329,150
|
|
|
$
|
436,819
|
|
|
$
|
77,360
|
|
|
$
|
239,777
|
|
|
$
|
110,554
|
|
Cash flow provided by financing activities
|
|
|
(349,402
|
)
|
|
|
(229,192
|
)
|
|
|
(436,799
|
)
|
|
|
(85,919
|
)
|
|
|
968,689
|
|
|
|
16,142
|
|
Distributable Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions related to period expected from ETP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partner interests
|
|
|
167,580
|
|
|
|
166,018
|
|
|
|
221,878
|
|
|
|
70,313
|
|
|
|
199,221
|
|
|
|
91,127
|
|
General partner interests
|
|
|
14,588
|
|
|
|
12,740
|
|
|
|
17,322
|
|
|
|
5,110
|
|
|
|
13,676
|
|
|
|
8,090
|
|
Incentive distribution rights
|
|
|
255,808
|
|
|
|
219,298
|
|
|
|
298,575
|
|
|
|
85,775
|
|
|
|
222,353
|
|
|
|
71,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions related to period expected from ETP
|
|
|
437,976
|
|
|
|
398,056
|
|
|
|
537,775
|
|
|
|
161,198
|
|
|
|
435,250
|
|
|
|
170,730
|
|
ETE related expenses
|
|
|
(2,205
|
)
|
|
|
(5,600
|
)
|
|
|
(7,007
|
)
|
|
|
(11,288
|
)
|
|
|
(10,343
|
)
|
|
|
(3,404
|
)
|
Interest expense, net of amortization of financing costs,
interest income, and realized gains and losses on interest rate
derivatives
|
|
|
(70,342
|
)
|
|
|
(74,218
|
)
|
|
|
(97,654
|
)
|
|
|
(34,748
|
)
|
|
|
(100,933
|
)
|
|
|
(35,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Cash Flow
|
|
$
|
365,429
|
|
|
$
|
318,238
|
|
|
$
|
433,114
|
|
|
$
|
115,162
|
|
|
$
|
323,974
|
|
|
$
|
132,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Cash Flow is an important non-GAAP financial
measure for management and investors because it indicates
whether we are generating cash flows at levels that can sustain
quarterly cash distributions to our unitholders at current or
increased levels. There are material limitations to using
measures such as Distributable Cash Flow, including the
difficulty associated with using such a measure as the sole
method to compare the results of one company to another, and the
inability to analyze certain significant items that directly
affect a companys net income or loss or cash flows. In
addition, our calculation of Distributable Cash Flow may not be
consistent with similarly titled measures of other companies and
should be viewed in conjunction with measurements that are
computed in accordance with GAAP, such as gross margin,
operating income, net income, and cash flow from operating
activities.
S-13
Definition
of Distributable Cash Flow
We define Distributable Cash Flow for a period as cash
distributions from ETP in respect of such period in connection
with our investments in limited and general partner interests of
ETP (determined based on cash distributions declared by ETP
during such period), net of our cash expenditures for general
and administrative costs and interest. The calculation of
Distributable Cash Flow includes 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. The GAAP measures most directly
comparable to Distributable Cash Flow are net income and cash
flow provided by operating activities for ETE on a stand-alone
basis.
Distributable Cash Flow previously presented in our press
releases was reduced by contributions made to ETP to maintain
our general partner interest at 2%. In July 2009, ETP amended
and restated its partnership agreement and as a result, we are
no longer required to maintain a 2% general partner interest.
Consequently, our capital contributions to ETP have been removed
from the calculation of Distributable Cash Flow. Contributions
to maintain the general partner interest were $3.4 million
and $13.1 million during the nine months ended
September 30, 2009 and 2008, respectively, and
$13.1 million for the year ended December 31, 2008.
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|
|
|
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|
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|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
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|
|
|
|
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Four Months
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|
|
|
|
|
|
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|
|
Nine Months Ended
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Year Ended
|
|
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Ended
|
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|
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|
|
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|
|
|
September 30,
|
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December 31,
|
|
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December 31,
|
|
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Years Ended August 31,
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2009
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|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Reconciliation of Net income to Distributable Cash Flow:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
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|
$
|
302,882
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|
|
$
|
352,478
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|
|
$
|
375,044
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|
|
$
|
92,677
|
|
|
$
|
319,360
|
|
|
$
|
107,140
|
|
Adjustments to derive Distributable Cash Flow:
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|
|
|
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|
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|
|
|
|
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|
|
|
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Equity in income of unconsolidated affiliates
|
|
|
(370,195
|
)
|
|
|
(441,299
|
)
|
|
|
(551,835
|
)
|
|
|
(168,547
|
)
|
|
|
(435,247
|
)
|
|
|
(204,987
|
)
|
Distributions related to period expected from ETP
|
|
|
437,976
|
|
|
|
398,056
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|
|
|
537,775
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|
|
|
161,198
|
|
|
|
435,251
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|
|
|
170,730
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|
Amortization included in interest
|
|
|
5,236
|
|
|
|
2,255
|
|
|
|
5,076
|
|
|
|
1,006
|
|
|
|
2,630
|
|
|
|
1,151
|
|
Unrealized (gains) losses on non-hedged interest rate swaps
|
|
|
(10,885
|
)
|
|
|
6,734
|
|
|
|
66,231
|
|
|
|
28,805
|
|
|
|
1,952
|
|
|
|
|
|
Other non-cash
|
|
|
415
|
|
|
|
14
|
|
|
|
823
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|
|
|
23
|
|
|
|
28
|
|
|
|
58,013
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Distributable Cash Flow
|
|
$
|
365,429
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|
|
$
|
318,238
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|
|
$
|
433,114
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|
|
$
|
115,162
|
|
|
$
|
323,974
|
|
|
$
|
132,047
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Cash flow provided by operating activities
to Distributable Cash Flow:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by operating activities
|
|
$
|
349,402
|
|
|
$
|
329,150
|
|
|
$
|
436,819
|
|
|
$
|
77,360
|
|
|
$
|
239,777
|
|
|
$
|
110,554
|
|
Adjustments to derive Distributable Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions related to period expected from ETP
|
|
|
437,976
|
|
|
|
398,056
|
|
|
|
537,775
|
|
|
|
161,198
|
|
|
|
435,251
|
|
|
|
170,730
|
|
Cash distributions received from ETP
|
|
|
(425,938
|
)
|
|
|
(399,295
|
)
|
|
|
(535,342
|
)
|
|
|
(110,878
|
)
|
|
|
(360,602
|
)
|
|
|
(149,283
|
)
|
Deferred income taxes
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities
|
|
|
3,340
|
|
|
|
(9,673
|
)
|
|
|
(6,138
|
)
|
|
|
(12,518
|
)
|
|
|
9,548
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Cash Flow
|
|
$
|
365,429
|
|
|
$
|
318,238
|
|
|
$
|
433,114
|
|
|
$
|
115,162
|
|
|
$
|
323,974
|
|
|
$
|
132,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
S-14
RISK
FACTORS
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 and subordinated to any of our
future secured indebtedness to the extent of the assets securing
such indebtedness.
We do not own any operating assets. Our principal assets consist
of approximately 62.5 million common units of ETP in
addition to the incentive distribution rights and general
partner interest of ETP, and we own these incentive distribution
rights and general partner interest through a wholly owned
subsidiary. 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.
In addition, holders of any of our secured indebtedness would
have claims with respect to the assets constituting collateral
for such indebtedness that are prior to the claims of the
holders of the notes. Borrowings under our revolving credit
facility will be secured by a substantial portion of our assets
and we may have additional secured indebtedness in the future.
In the event of a default on any secured indebtedness or our
bankruptcy, liquidation or reorganization, our assets would be
used to satisfy obligations with respect to the indebtedness
secured thereby before any payment could be made on the notes.
Accordingly, any such secured indebtedness would effectively
rank senior to the notes to the extent of the value of the
collateral securing the indebtedness. While the indenture
governing the notes places some limitations on our ability to
create liens, there are significant exceptions to these
limitations that will allow us to secure some kinds of
indebtedness without equally and ratably securing the notes. To
the extent the value of the collateral is not sufficient to
satisfy the secured indebtedness, the holders of that
indebtedness would be entitled to share with the holders of the
notes and the holders of other claims against us with respect to
our other assets.
Neither
ETP nor any of its subsidiaries will guarantee the payment of
the notes, and our ability to pay principal and interest on the
notes is dependent upon ETP having sufficient cash available for
distributions on its common units and incentive distribution
rights after satisfaction of the debt obligations of ETP and its
subsidiaries.
Neither ETP nor any of its 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 in respect of our ETP
common units and incentive distribution rights of ETP, which
cash distributions are subject to the priority rights of
creditors of ETP and its subsidiaries. Accordingly, creditors of
ETP and its subsidiaries will have claims, with respect to the
assets of ETP and its subsidiaries, that rank effectively senior
to the notes. In the event of any distribution or payment of
assets of ETP and its subsidiaries in any dissolution, winding
up, liquidation, reorganization or other bankruptcy proceeding,
the claims of the creditors
S-15
of ETP and its subsidiaries must be satisfied prior to ETP
making any such distribution to us in respect of our direct or
indirect equity interests in ETP. 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 30, 2009, the notes
would have been effectively subordinated to approximately
$6.2 billion of outstanding indebtedness of ETP and its
subsidiaries. Furthermore, neither ETP nor any of its
subsidiaries are subject to any provisions of the indenture, and
therefore the indenture does not prohibit ETP or any of its
subsidiaries from incurring additional indebtedness.
We may
incur substantially more debt, which could further exacerbate
the risks related to our indebtedness.
Assuming we had completed this offering on September 30,
2009, ETE would have had approximately $1.76 billion of
indebtedness outstanding and our subsidiaries, including ETP and
its subsidiaries, would have had approximately $6.2 billion
of indebtedness outstanding. We and our subsidiaries, including
ETP, 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 trigger 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 trigger 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, 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
and Estate 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 the OID on the notes.
S-16
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, 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, therefore, our cash
flow is dependent upon the ability of ETP to make distributions
in respect of those partnership interests.
We do not have any significant assets other than our partnership
interests in ETP. As a result, our ability to make required
payments on the notes depends on the performance of ETP and its
subsidiaries and ETPs ability to make cash distributions
to us, which is dependent on the results of operations, cash
flows and financial condition of ETP.
The amount of cash that ETP can distribute to its partners,
including us, each quarter depends upon the amount of cash it
generates from its operations, which will fluctuate from quarter
to quarter and will depend on, among other things:
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|
|
|
|
the amount of natural gas transported through ETPs
transportation pipelines and gathering systems;
|
|
|
|
the level of throughput in its processing and treating
operations;
|
|
|
|
the fees it charges and the margins it realizes for its
gathering, treating, processing, storage and transportation
services;
|
|
|
|
the price of natural gas;
|
|
|
|
the relationship between natural gas and NGL prices;
|
|
|
|
the weather in its operating areas;
|
|
|
|
the cost of the propane it buys for resale and the prices it
receives for its propane;
|
|
|
|
the level of competition from other midstream companies,
interstate pipeline companies, propane companies and other
energy providers;
|
|
|
|
the level of its operating costs;
|
|
|
|
prevailing economic conditions; and
|
|
|
|
the level of ETPs hedging activities.
|
In addition, the actual amount of cash that ETP will have
available for distribution will also depend on other factors,
such as:
|
|
|
|
|
the level of capital expenditures it makes;
|
|
|
|
the level of costs related to litigation and regulatory
compliance matters;
|
|
|
|
the cost of acquisitions, if any;
|
|
|
|
the levels of any margin calls that result from changes in
commodity prices;
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|
|
|
its debt service requirements;
|
S-17
|
|
|
|
|
fluctuations in its working capital needs;
|
|
|
|
its ability to make working capital borrowings under its credit
facilities to make distributions;
|
|
|
|
its ability to access capital markets;
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|
|
|
restrictions on distributions contained in its debt agreements;
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|
|
|
the amount, if any, of cash reserves established by the board of
directors of its general partner in its discretion for the
proper conduct of ETPs business; and
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|
|
|
applicable state partnership laws and other laws and regulations.
|
ETE does not have any control over many of these factors,
including the level of cash reserves established by the board of
directors of ETPs general partner. Accordingly, we cannot
guarantee that ETP 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 has available for distribution depends primarily upon its
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 may make cash distributions during periods when it
records net losses and may not make cash distributions during
periods when it records net income. Please read Risks
Related to Energy Transfer Partners Business for a
discussion of further risks affecting ETPs ability to
generate distributable cash flow.
A
reduction in ETPs 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 GPs 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.
ETPs
consolidated debt level may limit the distributions we receive
from ETP, our future financial and operating flexibility and our
ability to make required payments on the notes.
As of September 30, 2009, ETP had approximately
$6.2 billion of consolidated debt outstanding. ETPs
level of indebtedness affects its operations in several ways,
including, among other things:
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|
|
|
|
a significant portion of ETPs cash flow from operations
will be dedicated to the payment of principal and interest on
outstanding debt and will not be available for other purposes,
including payment of distributions by ETP to us;
|
|
|
|
covenants contained in ETPs existing debt arrangements
require ETP to meet financial tests that may adversely affect
its flexibility in planning for and reacting to changes in its
business;
|
|
|
|
ETPs ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general
partnership purposes may be limited;
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|
|
|
ETP may be at a competitive disadvantage relative to similar
companies that have less debt;
|
|
|
|
ETP may be more vulnerable to adverse economic and industry
conditions as a result of its significant debt level; and
|
S-18
|
|
|
|
|
failure to comply with the various restrictive and affirmative
covenants of the credit agreements could negatively impact
ETPs ability to incur additional debt and to pay
distributions.
|
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:
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|
|
|
|
to provide for the proper conduct of our business and the
businesses of our operating subsidiaries (including reserves for
future capital expenditures and for our anticipated future
credit needs);
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|
|
|
to reimburse our general partner for all expenses it has
incurred on our behalf;
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|
|
|
to provide funds for distributions to our unitholders and our
general partner for any one or more of the next four calendar
quarters; or
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|
|
|
to comply with applicable law or any of our loan or other
agreements.
|
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 is
not prohibited from competing with us.
Neither our partnership agreement nor the partnership agreement
of ETP prohibits ETP from owning assets or engaging in
businesses that compete directly or indirectly with us.
Additionally, ETPs partnership agreement prohibits us from
engaging in the retail propane business in the United States. In
addition, ETP
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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
September 30, 2009, we had approximately $7.79 billion
of consolidated debt, of which approximately $5.73 billion
was at fixed interest rates and approximately $2.06 billion
was at variable interest rates. We have entered interest rate
swaps for a total notional amount of $2.00 billion,
resulting in a net amount of $0.06 billion of variable-rate
debt at September 30, 2009. We may enter into additional
interest rate swap arrangements. As a result, our results of
operations, cash flows and financial condition could be
materially adversely affected by significant increases in
interest rates.
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 in
the future we cease to manage and control ETP, we may be deemed
to be an investment company under the Investment Company Act of
1940.
If we cease to manage and control ETP 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 we or ETP were
to be treated as a corporation or if we or ETP becomes 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.
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If ETP
GP withdraws or is removed as ETPs general partner, then
we would lose control over the management and affairs of ETP,
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 could be cashed out or
converted into ETP common units at an unattractive
valuation.
Under the terms of ETPs partnership agreement, ETP GP will
be deemed to have withdrawn as general partner if, among other
things, it:
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voluntarily withdraws from the partnership by giving notice to
the other partners;
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transfers all, but not less than all, of its partnership
interests to another entity in accordance with the terms of
ETPs Partnership Agreement;
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makes a general assignment for the benefit of creditors, files a
voluntary bankruptcy petition, seeks to liquidate, acquiesces in
the appointment of a trustee, receiver or liquidator, or becomes
subject to an involuntary bankruptcy petition; or
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dissolves itself under Delaware law without reinstatement within
the requisite period.
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In addition, ETP GP can be removed as ETPs general partner
if that removal is approved by unitholders holding at least
662/3%
of ETPs outstanding common units (including units held by
ETP GP and its affiliates). Currently, ETP GP and its affiliates
own approximately 33% of ETPs outstanding common units.
If ETP GP withdraws from being ETPs general partner in
compliance with ETPs partnership agreement or is removed
from being ETPs 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 for fair market value. If ETP GP withdraws from being
ETPs general partner in violation of ETPs
partnership agreement or is removed from being ETPs
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 ETPs 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 held by ETP GP in ETP for fair market value, then the
general partner interests and incentive distribution rights held
by ETP GP in ETP 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 would lose control over the
management and affairs of ETP, thereby increasing the risk that
we would be deemed an investment company subject to regulation
under the Investment Company Act of 1940. In addition, our
indirect ownership of the general partner interests and 100% of
the incentive distribution rights in ETP, to which a significant
portion of the value of our common units is currently
attributable, could be cashed out or converted into ETP common
units at an unattractive valuation.
An
impairment of goodwill and intangible assets could reduce our
earnings.
At September 30, 2009, our consolidated balance sheet
reflected $765.9 million of goodwill and
$401.2 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.
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ETP
may issue additional common units, which may increase the risk
that ETP will not have sufficient available cash to maintain or
increase its per unit distribution level.
The partnership agreement of ETP allows ETP to issue an
unlimited number of additional limited partner interests. The
issuance of additional common units or other equity securities
by ETP will have the following effects:
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unitholders current proportionate ownership interest in
ETP will decrease;
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the amount of cash available for distribution on each common
unit or partnership security may decrease;
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the ratio of taxable income to distributions may increase;
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the relative voting strength of each previously outstanding
common unit may be diminished; and
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the market price of ETPs common units may decline.
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The payment of distributions on any additional units issued by
ETP may increase the risk that ETP 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 we or ETP were to be treated as a
corporation or if we or ETP becomes 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 and ETP are 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. Because a tax would
then be imposed upon us as a corporation, our cash available for
payment of principal and interest on the notes would be
substantially reduced. Therefore, treatment of us or ETP as a
corporation would result in a material reduction in the
anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the value of our
common units.
If ETP 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. Distributions to us would generally be taxed
again as corporate distributions, and no income, gains, losses,
deduction or credits would flow through to us. As a result,
there would be a material reduction in our anticipated cash flow.
Moreover, current law may change, causing us or ETP to be
treated as a corporation for federal income tax purposes or
otherwise subjecting us or ETP 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.
Specifically, federal income tax legislation has been considered
that would have eliminated partnership tax treatment for certain
publicly traded partnerships and recharacterize certain types of
income received from partnerships. We or ETP are unable to
predict whether any of these changes, or other proposals, will
be reintroduced or will ultimately be enacted.
Risks
Related to Conflicts of Interest
Although
we control ETP through our ownership of its general partner,
ETPs general partner owes fiduciary duties to ETP and
ETPs 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,
including ETPs general partner, on the one hand, and ETP
and its limited partners, on the other hand. The directors and
officers of ETPs general partner have fiduciary duties to
manage ETP in a manner
S-22
beneficial to us, its owner. At the same time, the general
partner has a fiduciary duty to manage ETP in a manner
beneficial to ETP and its limited partners. The board of
directors of ETPs general partner will resolve any such
conflict and has 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 may arise in the following
situations:
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the allocation of shared overhead expenses to ETP and us;
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the interpretation and enforcement of contractual obligations
between us and our affiliates, on the one hand, and ETP, on the
other hand;
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the determination of the amount of cash to be distributed to
ETPs partners and the amount of cash to be reserved for
the future conduct of ETPs business;
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the determination whether to make borrowings under ETPs
revolving credit facility to pay distributions to ETPs
partners; and
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any decision we make in the future to engage in business
activities independent of ETP.
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The
fiduciary duties of our general partners officers and
directors may conflict with those of ETPs general
partner.
Conflicts of interest may arise because of the relationships
between ETPs general partner, ETP and us. Our general
partners directors and officers have fiduciary duties to
manage our business in a manner beneficial to us and our
unitholders. Some of our general partners directors are
also directors and officers of ETPs general partner, and
have fiduciary duties to manage the business of ETP in a manner
beneficial to ETP and ETPs 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.
Enterprise GP Holdings L.P. and its subsidiaries own and operate
a North American midstream energy business that competes with us
and ETP with respect to ETPs natural gas midstream
business.
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:
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Our general partner is allowed to take into account the
interests of parties other than us, including ETP and its
affiliates and any general partners and limited partnerships
acquired in the future, in resolving conflicts of interest,
which has the effect of limiting its fiduciary duties to us.
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Our general partner has limited its liability and reduced its
fiduciary duties under the terms of our partnership agreement,
while also restricting the remedies available for actions that,
without these limitations, might constitute breaches of
fiduciary duty. As a result of purchasing our units, unitholders
consent to various actions and conflicts of interest that might
otherwise constitute a breach of fiduciary or other duties under
applicable state law.
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S-23
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Our general partner determines the amount and timing of our
investment transactions, borrowings, issuances of additional
partnership securities and reserves, each of which can affect
the amount of cash that is available for distribution.
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Our general partner determines which costs it and its affiliates
have incurred are reimbursable by us.
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Our partnership agreement does not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered, or from entering into additional contractual
arrangements with any of these entities on our behalf, so long
as the terms of any such payments or additional contractual
arrangements are fair and reasonable to us.
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Our general partner controls the enforcement of obligations owed
to us by it and its affiliates.
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Our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
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Our
partnership agreement limits our general partners
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:
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permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and factors that it desires, and it has no
duty or obligation to give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner;
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provides that our general partner is entitled to make other
decisions in good faith if it reasonably believes
that the decisions are in our best interests;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the Audit and Conflicts
Committee of the board of directors of our general partner and
not involving a vote of unitholders must be on terms no less
favorable to us than those generally being provided to or
available from unrelated third parties or be fair and
reasonable to us and that, in determining whether a
transaction or resolution is fair and reasonable,
our general partner may consider the totality of the
relationships among the parties involved, including other
transactions that may be particularly advantageous or beneficial
to us; and
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for any acts or omissions unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that the general partner or
those other persons acted in bad faith or engaged in fraud,
willful misconduct or gross negligence.
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Risks
Related to Energy Transfer Partners Business
Since our cash flows consist exclusively of distributions from
ETP, risks to ETPs business are also risks to us. We have
set forth below risks to ETPs business, the occurrence of
which could have a negative impact on ETPs financial
performance and decrease the amount of cash it is able to
distribute to us.
ETP
may not be able to obtain funding on acceptable terms or at all
under its revolving credit facility or otherwise because of the
deterioration of the credit and capital markets. This may hinder
or prevent ETP from meeting future capital needs.
Global financial markets have been, and continue to be,
disrupted and volatile due to a variety of factors, including
significant write-offs in the financial services sector and the
current weak economic conditions. As a result, the cost of
raising money in the debt and equity capital markets has
increased substantially while the availability of funds from
those markets has diminished significantly. In particular, as a
result of concerns
S-24
about the stability of financial markets generally and the
solvency of lending counterparties specifically, the cost of
obtaining money from the credit markets generally has increased
as many lenders and institutional investors have increased
interest rates, enacted tighter lending standards, refused to
refinance existing debt on similar terms or at all and reduced,
or in some cases ceased, to provide funding to borrowers. In
addition, lending counterparties under existing revolving credit
facilities and other debt instruments may be unwilling or unable
to meet their funding obligations. Due to these factors, ETP
cannot be certain that new debt or equity financing will be
available on acceptable terms. If funding is not available when
needed, or is available only on unfavorable terms, ETP may be
unable to meet its obligations as they come due or ETP may be
required to post collateral to support its obligations.
Moreover, without adequate funding, ETP may be unable to execute
its growth strategy, complete future acquisitions or announced
and future pipeline construction projects, take advantage of
other business opportunities or respond to competitive
pressures, any of which could have a material adverse effect on
ETPs revenues and results of operations.
As of September 30, 2009, ETP had approximately
$6.2 billion of consolidated debt outstanding. A
significant increase in ETPs indebtedness that is
proportionately greater than ETPs issuances of equity
could negatively impact ETPs credit ratings or its ability
to remain in compliance with the financial covenants under
ETPs revolving credit agreement, which could have a
material adverse effect on ETPs financial condition,
results of operations and cash flows.
Many
of ETPs customers drilling activity levels and
spending for transportation on ETPs pipeline system may be
impacted by the current deterioration in commodity prices and
the credit markets.
Many of ETPs customers finance their drilling activities
through cash flow from operations, the incurrence of debt or the
issuance of equity. Recently, there has been a significant
decline in the credit markets and the availability of credit.
Additionally, many of ETPs customers equity values
have substantially declined. The combination of a reduction of
cash flow resulting from recent declines in natural gas prices,
a reduction in borrowing base under reserve-based credit
facilities and the lack of availability of debt or equity
financing may result in a significant reduction in ETPs
customers spending for natural gas drilling activity,
which could result in lower volumes being transported on
ETPs pipeline systems. A significant reduction in drilling
activity could have a material adverse effect on ETPs
operations.
ETP is
exposed to the credit risk of its customers, and an increase in
the nonpayment and nonperformance by its customers could reduce
its ability to make distributions to its unitholders, including
to us.
The risks of nonpayment and nonperformance by ETPs
customers are a major concern in its business. 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 is subject to risks of
loss resulting from nonpayment or nonperformance by its
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 ETPs customers. Any substantial increase
in the nonpayment and nonperformance by ETPs customers
could have a material adverse effect on ETPs 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 FERCs
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
S-25
suppressing prices that were included in the Platts Inside FERC
Houston Ship Channel index, published by McGraw-Hill Companies,
on which the pricing of many physical natural gas contracts and
financial derivatives are based. In its Order and Notice, the
FERC also alleged that ETP manipulated daily prices at the Waha
and Permian Hubs in west Texas on two dates. The FERC also
alleged that one of ETPs 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.
The FERC specified that it was also seeking to revoke, for a
period of 12 months, ETPs blanket marketing authority
for sales of natural gas in interstate commerce at market-based
prices. In February 2008, the FERCs Enforcement Staff also
recommended that the FERC pursue market manipulation claims
related to ETPs trading activities in October 2005 for
November 2005 monthly deliveries, a period not previously
covered by the FERCs 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 FERCs 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 will make a $5 million payment to the
federal government and will establish a $25 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 elect to make a claim against the
funds, including existing litigation claims as well as any new
claims that may be asserted against this fund. Any unused
portion of the fund shall be paid to the United States Treasury.
The administrative law judge appointed by the FERC will
determine the validity of any third party claim against this
fund. Any party who receives money from this fund will be
required to waive all claims against ETP related to this matter.
The claims of third parties that do not elect to pursue the fund
are unaffected. Pursuant to the settlement agreement, the FERC
made no findings of fact or conclusions of law. In addition, the
settlement agreement specifies that 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 addition to the FERC legal action, third parties have
asserted claims and may assert additional claims against us and
ETP alleging damages related to these matters. In this regard,
several natural gas producers and a natural gas marketing
company have initiated legal proceedings in Texas state courts
against us and ETP for claims related to the FERC claims. These
suits contain contract and tort claims relating to alleged
manipulation of natural gas prices at the Houston Ship Channel
and the Waha Hub in West Texas, as well as the natural gas price
indices related to these markets and the Permian Basin natural
gas price index during the period from December 2003 through
December 2006, and seek unspecified direct, indirect,
consequential and exemplary damages. One of the suits against us
and ETP contains an additional allegation that we and ETP
transported gas in a manner that favored our affiliates and
discriminated against the plaintiff, and otherwise artificially
affected the market price of gas to other parties in the market.
We have moved to compel arbitration
and/or
contested subject-matter jurisdiction in some of these cases. In
one of these cases, the Texas Supreme Court ruled on
July 3, 2009 that the state district court erred in ruling
that a plaintiff was entitled to pre-arbitration discovery and
therefore remanded to the state district court with a direction
to rule on our original motion to compel arbitration pursuant to
the terms of the arbitration clause in a natural gas contract
between us and the plaintiff. This plaintiff has filed a motion
with the Texas Supreme Court requesting a rehearing of the
ruling.
In February 2008, ETP was served with a complaint from an owner
of royalty interests in natural gas producing properties,
individually and on behalf of a putative class of similarly
situated royalty owners, working interest owners and
producer/operators, seeking arbitration to recover damages based
on alleged manipulation of natural gas prices at the Houston
Ship Channel. 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
ETPs motion for summary judgment on that issue. This
action is currently on appeal before the First Court of Appeals,
Houston, Texas.
S-26
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 28, 2009, these decisions were appealed by the
plaintiffs to the United States Court of Appeals for the
5th Circuit, and the appeal is currently in briefing stage
before the court.
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 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 plaintiffs motion and granted
ETPs motion to dismiss the complaint. On
September 10, 2009, this decision was appealed by the
plaintiff to the United States Court of Appeals for the
5th Circuit, and the appeal is currently in briefing stage
before the court.
ETP is expensing the legal fees, consultants fees and
other expenses relating to these matters in the periods in which
such expenses 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 increased its
accrual for these matters to $30.0 million in the aggregate
as of September 30, 2009. While 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 accrual
that is used to satisfy third-party claims, ETP may not be able
to realize such tax benefits. Although this accrual 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 new
accrual related to these 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
S-27
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 ETPs 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 ETPs midstream and intrastate
transportation and storage operations are 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 ETPs control and have been
volatile.
Income from ETPs midstream and intrastate transportation
and storage operations is exposed to risks due to fluctuations
in commodity prices. For a portion of the natural gas gathered
at the North Texas System, Southeast Texas System and ETPs
Houston pipeline system, which we refer to as the HPL System,
ETP purchases natural gas from producers at the wellhead and
then gathers and delivers the natural gas to pipelines where ETP
typically resells the natural gas under various arrangements,
including sales at index prices. Generally, the gross margins
ETP realizes under these arrangements decrease in periods of low
natural gas prices.
For a portion of the natural gas gathered and processed at the
North Texas System and Southeast Texas System, ETP enters into
percentage-of-proceeds
arrangements, keep-whole arrangements, and processing fee
agreements pursuant to which ETP agrees to gather and process
natural gas received from the producers. Under
percentage-of-proceeds
arrangements, ETP generally sells the residue gas and NGLs at
market prices and remits to the producers an agreed upon
percentage of the proceeds based on an index price. In other
cases, instead of remitting cash payments to the producer, ETP
delivers an agreed upon percentage of the residue gas and NGL
volumes to the producer and sells the volumes it keeps to third
parties at market prices. Under these arrangements, ETPs
revenues and gross margins decline when natural gas prices and
NGL prices decrease. Accordingly, a decrease in the price of
natural gas or NGLs could have an adverse effect on ETPs
results of operations. Under keep-whole arrangements, ETP
generally sells the NGLs produced from its gathering and
processing operations to third parties at market prices. Because
the extraction of the NGLs from the natural gas during
processing reduces the British thermal unit, or Btu, content of
the natural gas, ETP must either purchase natural gas at market
prices for return to producers or make a cash payment to
producers equal to the value of this natural gas. Under these
arrangements, ETPs revenues and gross margins decrease
when the price of natural gas increases relative to the price of
NGLs if ETP is not able to bypass its processing plants and sell
the unprocessed natural gas. Under processing fee agreements,
ETP processes the gas for a fee. If recoveries are less than
those guaranteed the producer, ETP may suffer a loss by having
to supply liquids or its cash equivalent to keep the producer
whole with regard to contractual recoveries.
In the past, the prices of natural gas and NGLs have been
extremely volatile, and ETP expects this volatility to continue.
For example, during ETPs year ended December 31,
2008, the NYMEX settlement price for the prompt month contract
ranged from a high of $13.11 per million Btu, or MMBtu, to a low
of $6.47 per MMBtu. A composite of the Mt. Belvieu average NGLs
price based upon ETPs average NGLs composition during
ETPs year ended December 31, 2008 ranged from a high
of approximately $1.96 per gallon to a low of approximately
$0.66 per gallon.
ETPs Oasis pipeline, East Texas pipeline, ET Fuel System
and HPL System receive fees for transporting natural gas for
their customers. Although a significant amount of the pipeline
capacity of the East Texas pipeline and various pipeline
segments of the ET Fuel System is committed under long-term
fee-based contracts, the remaining capacity of ETPs
transportation pipelines is subject to fluctuation in demand
based on, among other factors, the markets and prices for
natural gas and NGLs, which factors may result in decisions by
natural gas producers to reduce production of natural gas during
periods of lower prices for natural gas and NGLs or may result
in decisions by end-users of natural gas and NGLs to reduce
consumption of these fuels during periods of higher prices for
these fuels. ETPs fuel retention fees are also directly
impacted by changes in natural gas prices. Increases in natural
gas prices tend to increase ETPs fuel retention fees, and
decreases in natural gas prices tend to decrease its fuel
retention fees.
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The markets and prices for natural gas and NGLs depend upon
factors beyond ETPs control. These factors include demand
for oil, natural gas and NGLs, which fluctuate with changes in
market and economic conditions, and other factors, including:
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the impact of weather on the demand for oil and natural gas;
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the level of domestic oil and natural gas production;
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the availability of imported oil and natural gas;
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actions taken by foreign oil and gas producing nations;
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the availability of local, intrastate and interstate
transportation systems;
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the price, availability and marketing of competitive fuels;
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the demand for electricity;
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the impact of energy conservation efforts; and
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the extent of governmental regulation and taxation.
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The
use of derivative financial instruments could result in material
financial losses by ETP.
From time to time, ETP has 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 ETP 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
in ETPs favor. In addition, even though monitored by
management, ETPs 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 ETPs physical
or financial positions, or hedging policies and procedures are
not followed.
ETPs
success depends upon its ability to continually contract for new
sources of natural gas supply.
In order to maintain or increase throughput levels on ETPs
gathering and transportation pipeline systems and asset
utilization rates at its treating and processing plants, ETP
must continually contract for new natural gas supplies and
natural gas transportation services. ETP may not be able to
obtain additional contracts for natural gas supplies for its
natural gas gathering systems, and it may be unable to maintain
or increase the levels of natural gas throughput on its
transportation pipelines. The primary factors affecting
ETPs ability to connect new supplies of natural gas to its
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 ETPs gathering systems or in areas that
provide access to its transportation pipelines or markets to
which its systems connect. The primary factors affecting
ETPs ability to attract customers to its transportation
pipelines consist of its 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
has no control over the level of drilling activity in its 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
has 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 ETPs assets, including its
gathering systems and its processing and treating plants, are
connected to natural gas reserves and wells for which the
production will naturally decline over
S-29
time. Accordingly, ETPs cash flows will also decline
unless it is able to access new supplies of natural gas by
connecting additional production to these systems.
ETPs transportation pipelines are also dependent upon
natural gas production in areas served by its pipelines or in
areas served by other gathering systems or transportation
pipelines that connect with its transportation pipelines. A
material decrease in natural gas production in ETPs areas
of operation or in other areas that are connected to ETPs
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 handles, which would reduce ETPs revenues and
operating income. In addition, ETPs future growth will
depend, in part, upon whether it can contract for additional
supplies at a greater rate than the natural decline rate in
ETPs currently connected supplies.
Transwestern Pipeline Company, LLC, or Transwestern, derives a
significant portion of its revenue from charging its customers
for reservation of capacity, which Transwestern receives
regardless of whether these customers actually use the reserved
capacity. Transwestern also generates revenue from
transportation of natural gas for customers without reserved
capacity. As the reserves available through the supply basins
connected to Transwesterns systems naturally decline, a
decrease in development or production activity could cause a
decrease in the volume of natural gas available for transmission
or a decrease in demand for natural gas transportation on the
Transwestern system over the long run. Investments by third
parties in the development of new natural gas reserves connected
to Transwesterns facilities depend on many factors beyond
Transwesterns control.
The volumes of natural gas ETP transports on its intrastate
transportation pipelines may be reduced in the event that the
prices at which natural gas is purchased and sold at the Waha
Hub, the Katy Hub, the Carthage Hub and the Houston Ship Channel
Hub, the four major natural gas trading hubs served by
ETPs pipelines, become unfavorable in relation to prices
for natural gas at other natural gas trading hubs or in other
markets as customers may elect to transport their natural gas to
these other hubs or markets using pipelines other than those ETP
operates.
ETP
may not be able to fully execute its growth strategy if it
encounters increased competition for qualified
assets.
ETPs strategy contemplates growth through the development
and acquisition of a wide range of midstream, transportation,
storage, propane and other energy infrastructure assets while
maintaining a strong balance sheet. This strategy includes
constructing and acquiring additional assets and businesses to
enhance its ability to compete effectively and diversify its
asset portfolio, thereby providing more stable cash flow. ETP
regularly considers and enters into discussions regarding, and
is currently contemplating, the acquisition of additional assets
and businesses, stand-alone development projects or other
transactions that ETP believes will present opportunities to
realize synergies and increase its cash flow.
Consistent with ETPs acquisition strategy, management is
continuously engaged in discussions with potential sellers
regarding the possible acquisition of additional assets or
businesses. Such acquisition efforts may involve ETP
managements participation in processes that involve a
number of potential buyers, commonly referred to as
auction processes, as well as situations in which
ETP 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 ETPs current or future
acquisition efforts will be successful or that any such
acquisition will be completed on terms considered favorable to
ETP.
In addition, ETP is experiencing increased competition for the
assets it purchases or contemplates purchasing. Increased
competition for a limited pool of assets could result in ETP
losing to other bidders more often or acquiring assets at higher
prices, both of which would limit ETPs ability to fully
execute its growth strategy. Inability to execute its growth
strategy may materially adversely impact ETPs results of
operations.
S-30
If ETP
does not make acquisitions on economically acceptable terms, its
future growth could be limited.
ETPs results of operations and its ability to grow and to
increase distributions to unitholders will depend in part on its
ability to make acquisitions that are accretive to ETPs
distributable cash flow per unit.
ETP may be unable to make accretive acquisitions for any of the
following reasons, among others:
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because ETP is unable to identify attractive acquisition
candidates or negotiate acceptable purchase contracts with them;
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because ETP is unable to raise financing for such acquisitions
on economically acceptable terms; or
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because ETP is outbid by competitors, some of which are
substantially larger than ETP and have greater financial
resources and lower costs of capital then it does.
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Furthermore, even if ETP 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 may:
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fail to realize anticipated benefits, such as new customer
relationships, cost-savings or cash flow enhancements;
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decrease its liquidity by using a significant portion of its
available cash or borrowing capacity to finance acquisitions;
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significantly increase its interest expense or financial
leverage if ETP incurs additional debt to finance acquisitions;
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encounter difficulties operating in new geographic areas or new
lines of business;
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incur or assume unanticipated liabilities, losses or costs
associated with the business or assets acquired for which ETP is
not indemnified or for which the indemnity is inadequate;
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be unable to hire, train or retrain qualified personnel to
manage and operate its growing business and assets;
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less effectively manage its historical assets, due to the
diversion of ETP managements attention from other business
concerns; or
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incur other significant charges, such as impairment of goodwill
or other intangible assets, asset devaluation or restructuring
charges.
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If ETP consummates future acquisitions, its capitalization and
results of operations may change significantly. As ETP
determines the application of its funds and other resources, you
will not have an opportunity to evaluate the economics,
financial and other relevant information that ETP will consider.
If ETP
does not continue to construct new pipelines, its future growth
could be limited.
During the past several years, ETP has constructed several new
pipelines, and ETP is currently involved in constructing
additional pipelines. ETPs results of operations and its
ability to grow and to increase distributable cash flow per unit
will depend, in part, on its ability to construct pipelines that
are accretive to ETPs distributable cash flow. ETP may be
unable to construct pipelines that are accretive to
distributable cash flow for any of the following reasons, among
others:
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ETP is unable to identify pipeline construction opportunities
with favorable projected financial returns;
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ETP is unable to raise financing for its identified pipeline
construction opportunities; or
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ETP is unable to secure sufficient natural gas transportation
commitments from potential customers due to competition from
other pipeline construction projects or for other reasons.
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S-31
Furthermore, even if ETP constructs a pipeline that it believes
will be accretive, the pipeline may in fact adversely affect its
results of operations or results from those projected prior to
commencement of construction and other factors.
Expanding
ETPs business by constructing new pipelines and treating
and processing facilities subjects it to risks.
One of the ways that ETP has grown its business is through the
construction of additions to its 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 ETPs control and require the
expenditure of significant amounts of capital that ETP will be
required to finance through borrowings, the issuance of
additional equity or from operating cash flow. If ETP undertakes
these projects, they may not be completed on schedule or at all
or at the budgeted cost. 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 ETPs 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 ETPs results of operations and cash
flows. Moreover, ETPs revenues may not increase
immediately following the completion of particular projects. For
instance, if ETP builds a new pipeline, the construction will
occur over an extended period of time, but ETP may not
materially increase its revenues until long after the
projects 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 ETPs ability to
obtain commitments from producers in this area to utilize the
newly constructed pipelines. In this regard, ETP 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 ETPs expected investment return,
which could adversely affect its results of operations and
financial condition.
ETP
depends on certain key producers for its supply of natural gas
on the Southeast Texas System and North Texas System, and the
loss of any of these key producers could adversely affect its
financial results.
For ETPs year ended December 31, 2008, XTO Energy
Inc., EnCana Oil and Gas (USA), Inc., Sandridge Energy Inc. and
ConocoPhillips Company supplied ETP with approximately 75% of
the Southeast Texas Systems natural gas supply. For
ETPs year ended December 31, 2008, XTO Energy Inc.,
Chesapeake Energy Marketing, Inc., EnCana Oil and Gas (USA),
Inc. and EOG Resources, Inc. supplied ETP with approximately 75%
of the North Texas Systems natural gas supply. ETP is not
the only option available to these producers for disposition of
the natural gas they produce. To the extent that these and other
producers may reduce the volumes of natural gas that they supply
ETP, ETP would be adversely affected unless it was able to
acquire comparable supplies of natural gas from other producers.
ETP
depends on key customers to transport natural gas through its
pipelines.
ETP has nine- and ten-year fee-based transportation contracts
with XTO Energy, Inc., or XTO, that terminate in 2013 and 2017,
respectively, pursuant to which XTO has committed to transport
certain minimum volumes of natural gas on pipelines in
ETPs ET Fuel System. ETP also has an eight-year fee-based
transportation contract with TXU Portfolio Management Company,
L.P., a subsidiary of TXU Corp., which is referred to as TXU
Shipper, to transport natural gas on the ET Fuel System to
TXUs electric generating power plants. ETP has also
entered into two eight-year natural gas storage contracts that
terminate in 2012 with TXU Shipper to store natural gas at the
two natural gas storage facilities that are part of the ET Fuel
System. Each of the contracts with TXU Shipper may be extended
by TXU Shipper for two additional five-year terms. The failure
of XTO or TXU Shipper to fulfill their contractual obligations
under these contracts
S-32
could have a material adverse effect on ETPs and our cash
flow and results of operations if ETP was not able to replace
these customers under arrangements that provide similar economic
benefits as these existing contracts.
The major shippers on ETPs intrastate transportation
pipelines include XTO, EOG Resources, Inc., Chesapeake Energy
Marketing, Inc., EnCana Marketing (USA), Inc. and Quicksilver
Resources, Inc. These shippers have long-term contracts that
have remaining terms of up to fifteen years. The failure of
these shippers to fulfill their contractual obligations could
have a material adverse effect on ETPs and our cash flow
and results of operations if ETP was not able to replace these
customers under arrangements that provide similar economic
benefits as these existing contracts.
With respect to ETPs interstate transportation operations,
Midcontinent Express Pipeline, LLC, or MEP, has secured
predominantly
10-year firm
transportation contracts from a small number of major shippers
for all of the initial 1.5 Bcf/d of capacity on the
Midcontinent Express pipeline. MEP has also secured firm
transportation commitments for an additional 0.3 Bcf/d of
capacity on the Midcontinent Express pipeline, which expansion
is subject to regulatory approval. Fayetteville Express
Pipeline, LLC, or FEP, has secured a binding
10-year
commitment for approximately 1.85 Bcf/d of firm
transportation service on the 2.0 Bcf/d Fayetteville
Express pipeline project. In connection with ETPs Tiger
pipeline project, ETP has entered into agreements with multiple
shippers that provide for 10- and
15-year
commitments for firm transportation capacity of all of the total
initial capacity of at least 2.0 Bcf/d. The failure of
these key shippers to fulfill their contractual obligations
could have a material adverse effect on ETPs and our cash
flow and results of operations if ETP were 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 ETPs midstream and intrastate
assets.
ETPs midstream and intrastate transportation and storage
operations are generally exempt from FERC regulation under the
NGA, but FERC regulation still significantly affects its
business and the market for its 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. Under Section 311, rates charged for
transportation and storage must be fair and equitable amounts.
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 pipelines 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 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 pipelines 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 FERCs 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
FERCs ability to assess market forces and detect market
manipulation. These regulations may result in administrative
burdens and additional compliance costs for ETP.
ETP holds transportation contracts with interstate pipelines
that are subject to FERC regulation. As a shipper on an
interstate pipeline, ETP is subject to FERC requirements related
to use of the interstate capacity. Any failure on ETPs
part to comply with the FERCs regulations or orders could
result in the imposition of administrative, civil and criminal
penalties.
ETPs intrastate transportation and storage operations are
subject to state regulation in Texas, New Mexico, Arizona,
Louisiana, Utah and Colorado, the states in which ETP operates
these types of natural gas
S-33
facilities. ETPs 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 TRRCs 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, ETPs business may be
adversely affected.
ETPs midstream and intrastate transportation operations
are also subject to ratable take and common purchaser statutes
in Texas, New Mexico, Arizona, Louisiana, Utah and Colorado.
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 ETPs 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 operates have
adopted complaint-based or other limited economic regulation of
natural gas gathering activities. States in which ETP operates
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 ETPs
business.
ETPs 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 TRRCs 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 facilitys 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 conducts 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 ETPs 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.
ETPs
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 ETPs 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 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
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October 2011. However, shippers (other than shippers that have
agreed, as parties to the Stipulation and Agreement, not to
challenge Transwesterns tariff rates through the remaining
term of the settlement) may 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
Midcontinent Express pipelines 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 pipelines
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. While FEP has
accepted the FERCs certificate authorization, this order
is subject to possible rehearing and judicial review. FERC has
not yet determined whether the Tiger pipeline should be granted
the requested authority. ETP cannot predict if, or when and with
what conditions, FERC authorization for the Tiger pipeline will
be granted.
Any successful challenge to the rates of ETPs 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 ETPs 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, to include an allowance for income taxes in
their regulated rates has been subject to extensive litigation
before FERC and the courts, and the FERCs current policy
is subject to future refinement or change.
The ability of interstate pipelines held in tax-pass-through
entities, like ETP, 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 FERCs 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 pipelines owners
have such actual or potential income tax liability will be
reviewed by FERC on a
case-by-case
basis. Under the FERCs policy, ETP thus remains eligible
to include an income tax allowance in the tariff rates its
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 ETPs 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, FERCs regulatory authority
extends to many other aspects of the business and operations of
ETPs interstate pipelines, including:
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operating terms and conditions of service;
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the types of services interstate pipelines may offer their
customers;
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construction of new facilities;
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acquisition, extension or abandonment of services or facilities;
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reporting and information posting requirements;
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accounts and records; and
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relationships with affiliated companies involved in all aspects
of the natural gas and energy businesses.
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Compliance with these requirements can be costly and burdensome.
Future changes to laws, regulations and policies in these areas
may impair the ability of ETPs interstate pipelines to
compete for business, may impair their ability to recover costs,
or may increase the cost and burden of operation.
ETP must on occasion rely upon rulings by FERC or other
governmental authorities to carry out certain of its business
plans. For example, in order to carry out its plan to construct
the Fayetteville Express and Tiger pipelines ETP must, 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 possible rehearing and judicial review.
Thus, we and ETP cannot guarantee that FERC will authorize
construction and operation of the Tiger pipeline. Moreover,
there is no guarantee that, if granted, certificate authority
for the Tiger pipeline will be granted in a timely manner or
will be free from potentially burdensome conditions. Similarly,
ETP was required to obtain from FERC a certificate of public
convenience and necessity to build, own and operate the
Midcontinent Express pipeline. In addition, MEP subsequently
amended its request to expand the capacity of its pipeline. FERC
has granted MEP certificate authority for this expansion project.
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, neither we nor ETP can give any assurance regarding the
likely future regulations under which ETP will operate its
interstate pipelines or the effect such regulation could have on
its business, financial condition, and results of operations.
ETPs
business involves hazardous substances and may be adversely
affected by environmental regulation.
ETPs natural gas as well as its 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 ETPs operations, result in
capital expenditures to manage, limit, or prevent emissions,
discharges, or releases of various materials from ETPs
pipelines, plants, and facilities, and impose substantial
liabilities for pollution resulting from ETPs operations.
Numerous 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 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
ETPs properties and facilities, many of which have been
used for industrial activities for a number of years, even if
such discharges were caused by ETPs predecessors. Private
parties, including the owners of properties through which
ETPs gathering systems pass or facilities where its
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. The total accrued future estimated cost of
remediation activities relating to ETPs Transwestern
pipeline operations is approximately $8.7 million, and such
activities are expected to continue through 2018.
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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 ETPs 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.
ETP has 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 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.
In response to scientific studies suggesting that emissions of
certain gases, commonly referred to as greenhouse
gases and including carbon dioxide and methane, may be
contributing to the warming of the Earths atmosphere and
other changes to the global climate, on June 26, 2009, the
U.S. House of Representatives passed the American
Clean Energy and Security Act of 2009, or
ACESA. ACESA would establish an economy-wide
cap-and-trade
program to reduce domestic emissions of greenhouse gases by 17%
from 2005 levels by 2020 and just over 80% by 2050. Under this
legislation, EPA would issue a capped and steadily declining
number of tradable emissions allowances to major sources of
greenhouse gas emissions, including producers of NGLs (that is,
gas processing plants), local natural gas distribution companies
and certain industrial facilities, so that such sources could
continue to emit greenhouse gases into the atmosphere. The cost
of these allowances would be expected to escalate significantly
over time. The U.S. Senate has begun work on its own
legislation for restricting domestic greenhouse gas emissions,
and the Senate bill contains many of the same elements as ACESA.
Although it is not possible at this time to predict when the
Senate might pass its own climate change legislation or how any
bill passed by the Senate would ultimately be reconciled with
ACESA, any future federal laws or implementing regulations that
may be adopted to address greenhouse gas emissions could require
ETP to incur increased operating costs and could adversely
affect demand for the natural gas and NGL products and services
ETP provides.
In addition, more than one-third of the states, either
individually or through multi-state regional initiatives,
already have begun implementing legal measures to reduce
emissions of greenhouse gases, primarily through regional
greenhouse gas cap and trade programs. These cap and trade
programs require major sources of emissions, such as electric
power plants, or major producers of fuels, such as refineries or
gas processing plants, to hold emission allowances for the
amounts of greenhouse gases that they emit or would be produced
as a result of the combustion of the fuels they produce.
Regulated entities with insufficient allowances are required to
acquire enough emission allowances from other allowances to make
up for any deficits. While the details of many of these regional
programs are still being worked out and while any federal
legislation that is passed would be expected to preempt the
state or regional greenhouse gas regulatory programs to some
extent, ETP could be required to purchase allowances under these
regional programs, either for greenhouse gas emissions resulting
from ETPs operations (e.g., compressor stations) or from
the combustion of fuels (e.g., natural gas) that ETP
processes.
Also, as a result of the United States Supreme Courts
decision on April 2, 2007 in Massachusetts,
et al. v. EPA, EPA was required to
determine whether greenhouse gas emissions from mobile sources
such as cars and trucks posed an endangerment to human health
and the environment. On December 7, 2009, the EPA announced
its findings that emissions of carbon dioxide, methane and other
greenhouse gases present an endangerment to human
health and the environment because emissions of such gases are,
according to the EPA, contributing to warming of the
earths atmosphere and other climatic changes. These
findings by the EPA allow the agency to proceed with the
adoption and implementation of regulations that would restrict
emissions of greenhouse gases under existing provisions of the
federal Clean Air Act. In late September 2009, the EPA proposed
two sets of regulations in anticipation of finalizing its
endangerment finding: one to reduce emissions of greenhouse
gases from motor vehicles and the other to control emissions of
greenhouse gases from stationary sources. Although the motor
vehicle rules are expected to be adopted in March 2010, it may
take the EPA several years to impose regulations limiting
emissions of greenhouse gases from stationary sources. In
addition, on September 22, 2009, the EPA issued a final
rule requiring the reporting by March
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2011 of calendar year 2010 greenhouse gas emissions from
specified large greenhouse gas emission sources in the United
States, including natural gas liquids fractionators and local
natural gas distribution companies. As with the regional
greenhouse gas regulatory programs, any federal greenhouse gas
legislation is expected to prevent the EPA from regulating
greenhouse gases under existing Clean Air Act regulatory
programs to some extent, but if Congress fails to pass
greenhouse gas legislation, the EPA is expected to continue its
announced regulatory actions. Any limitation on emissions of
greenhouse gases from ETPs equipment and operations could
require ETP to incur significant costs to reduce emissions of
greenhouse gases associated with ETPs operations or
acquire allowances at the prevailing rates in the marketplace.
Any
reduction in the capacity of, or the allocations to, ETPs
shippers in interconnecting, third-party pipelines could cause a
reduction of volumes transported in ETPs pipelines, which
would adversely affect ETPs revenues and cash
flow.
Users of ETPs 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 ETPs 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 ETPs pipelines.
Any reduction in volumes transported in ETPs pipelines
would adversely affect its revenues and cash flow.
ETP
encounters competition from other midstream, transportation and
storage companies and propane companies.
ETP experiences competition in all of its markets. ETPs
principal areas of competition include obtaining natural gas
supplies for the Southeast Texas System, North Texas System and
HPL System and natural gas transportation customers for its
transportation pipeline systems. ETPs competitors include
major integrated oil companies, interstate and intrastate
pipelines and companies that gather, compress, treat, process,
transport, store and market natural gas. The Southeast Texas
System competes with natural gas gathering and processing
systems owned by DCP Midstream, LLC.
The North Texas System competes with Crosstex North Texas
Gathering, LP and Devon Gas Services, LP for gathering and
processing. The East Texas pipeline competes with other natural
gas transportation pipelines that serve the Bossier Sands area
in east Texas and the Barnett Shale region in north Texas. The
ET Fuel System and the Oasis pipeline compete with a number of
other natural gas pipelines, including interstate and intrastate
pipelines that link the Waha Hub. The ET Fuel System competes
with other natural gas transportation pipelines serving the
Dallas/Ft. Worth area and other pipelines that serve the
east central Texas and south Texas markets. Pipelines that
ETP competes with in these areas include those owned by Atmos
Energy Corporation, Enterprise Products Partners, L.P., and
Enbridge, Inc. Some of ETPs competitors may have greater
financial resources and access to larger natural gas supplies
than it does.
The acquisitions of the HPL System and the Transwestern pipeline
increased the number of interstate pipelines and natural gas
markets to which ETP has access and expanded its principal areas
of competition to areas such as southeast Texas and the Texas
Gulf Coast. As a result of ETPs expanded market presence
and diversification, ETP faces additional competitors, such as
major integrated oil companies, interstate and intrastate
pipelines and companies that gather, compress, treat, process,
transport, store and market natural gas, that may have greater
financial resources and access to larger natural gas supplies
than ETP does.
The Transwestern pipeline and the Midcontinent Express pipeline
compete with, and upon completion the Fayetteville Express
pipeline will 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 ETPs 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
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fuels and other factors, including weather and natural gas
storage levels, affect the levels of natural gas transportation
volumes in the areas served by ETPs pipelines.
ETPs 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 ETPs 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 ETPs
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:
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price;
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reliability and quality of service;
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responsiveness to customer needs;
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safety concerns;
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long-standing customer relationships;
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the inconvenience of switching tanks and suppliers; and
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the lack of growth in the industry.
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The
inability to continue to access tribal lands could adversely
affect Transwesterns ability to operate its pipeline
system and the inability to recover the cost of
right-of-way
grants on tribal lands could adversely affect its financial
results.
Transwesterns ability to operate its pipeline system on
certain lands held in trust by the United States for the benefit
of a Native American tribe, which we refer to as tribal lands,
will depend on its success in maintaining existing
rights-of-way
and obtaining new
rights-of-way
on those tribal lands. Securing additional
rights-of-way
is also critical to Transwesterns ability to pursue
expansion projects. We cannot provide any assurance that
Transwestern will be able to acquire new
rights-of-way
on tribal lands or maintain access to existing
rights-of-way
upon the expiration of the current grants. ETPs financial
position could be adversely affected if the costs of new or
extended
right-of-way
grants cannot be recovered in rates.
ETP
may be unable to bypass the processing plants, which could
expose it to the risk of unfavorable processing
margins.
Because of ETPs ownership of the Oasis pipeline and ET
Fuel System, it can generally elect to bypass ETPs
processing plants when processing margins are unfavorable and
instead deliver pipeline-quality gas by blending rich gas from
the gathering systems with lean gas transported on the Oasis
pipeline and ET Fuel System. In some circumstances, such as when
ETP does not have a sufficient amount of lean gas to blend with
the volume of rich gas that it receives at the processing plant,
ETP may have to process the rich gas. If ETP has to process gas
when processing margins are unfavorable, its results of
operations will be adversely affected.
ETP
may be unable to retain existing customers or secure new
customers, which would reduce its revenues and limit its future
profitability.
The renewal or replacement of existing contracts with ETPs
customers at rates sufficient to maintain current revenues and
cash flows depends on a number of factors beyond its control,
including competition from other pipelines, and the price of,
and demand for, natural gas in the markets ETP serves.
For ETPs year ended December 31, 2008, approximately
27.3% of its sales of natural gas were to industrial end-users
and utilities. As a consequence of the increase in competition
in the industry and volatility of natural gas prices, end-users
and utilities are increasingly reluctant to enter into long-term
purchase
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contracts. Many end-users purchase natural gas from more than
one natural gas company and have the ability to change providers
at any time. Some of these end-users also have the ability to
switch between gas and alternate fuels in response to relative
price fluctuations in the market. Because there are many
companies of greatly varying size and financial capacity that
compete with ETP in the marketing of natural gas, ETP often
competes in the end-user and utilities markets primarily on the
basis of price. The inability of ETPs management to renew
or replace its current contracts as they expire and to respond
appropriately to changing market conditions could have a
negative effect on ETPs profitability.
ETPs
storage business depends on neighboring pipelines to transport
natural gas.
To obtain natural gas, ETPs storage business depends on
the pipelines to which they have access. Many of these pipelines
are owned by parties not affiliated with ETP. Any interruption
of service on those pipelines or adverse change in their terms
and conditions of service could have a material adverse effect
on ETPs ability, and the ability of its customers, to
transport natural gas to and from its facilities and a
corresponding material adverse effect on ETPs storage
revenues. In addition, the rates charged by those interconnected
pipelines for transportation to and from ETPs facilities
affect the utilization and value of its storage services.
Significant changes in the rates charged by those pipelines or
the rates charged by other pipelines with which the
interconnected pipelines compete could also have a material
adverse effect on ETPs storage revenues.
ETPs
pipeline integrity program may cause it to incur significant
costs and liabilities.
ETPs operations are subject to regulation by the U.S
Department of Transportation, or DOT, under the Pipeline
Hazardous Materials Safety Administration, or PHMSA, pursuant to
which the PHMSA has established regulations relating to the
design, installation, testing, construction, operation,
replacement and management of pipeline facilities. Moreover, the
PHMSA, through the Office of Pipeline Safety, has promulgated a
rule requiring pipeline operators to develop integrity
management programs to comprehensively evaluate their pipelines,
and take measures to protect pipeline segments located in what
the rule refers to as high consequence areas.
Through September 30, 2009, a total of $47.9 million
of capital costs and $25.7 million of operating and
maintenance costs have been incurred for pipeline integrity
testing, including $24.6 million of capital costs and
$12.6 million of operating and maintenance costs during the
first nine months of 2009. Integrity testing and assessment of
all of these assets will continue, and the potential exists that
results of such testing and assessment could cause ETP to incur
even greater capital and operating expenditures for repairs or
upgrades deemed necessary to ensure the continued safe and
reliable operation of its pipelines.
Since
weather conditions may adversely affect demand for propane,
ETPs financial conditions may be vulnerable to warm
winters.
Weather conditions have a significant impact on the demand for
propane for heating purposes because the majority of ETPs
customers rely heavily on propane as a heating fuel. Typically,
ETP sells approximately two-thirds of its retail propane volume
during the peak-heating season of October through March.
ETPs results of operations can be adversely affected by
warmer winter weather, which results in lower sales volumes. In
addition, to the extent that warm weather or other factors
adversely affect ETPs operating and financial results,
ETPs access to capital and its acquisition activities may
be limited. Variations in weather in one or more of the regions
where ETP operates can significantly affect the total volume of
propane that ETP sells and the profits realized on these sales.
Agricultural demand for propane may also be affected by weather,
including unseasonably cold or hot periods or dry weather
conditions that impact agricultural operations.
A
natural disaster, catastrophe or other event could result in
severe personal injury, property damage and environmental
damage, which could curtail ETPs operations and otherwise
materially adversely affect its cash flow.
Some of ETPs operations involve risks of personal injury,
property damage and environmental damage, which could curtail
its operations and otherwise materially adversely affect its
cash flow. For example, natural gas facilities operate at high
pressures, sometimes in excess of 1,100 pounds per square inch.
Virtually all of
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ETPs operations are exposed to potential natural
disasters, including hurricanes, tornadoes, storms, floods
and/or
earthquakes.
If one or more facilities that are owned by ETP or that deliver
natural gas or other products to ETP are damaged by severe
weather or any other disaster, accident, catastrophe or event,
ETPs operations could be significantly interrupted.
Similar interruptions could result from damage to production or
other facilities that supply ETPs facilities or other
stoppages arising from factors beyond its control. These
interruptions might involve significant damage to people,
property or the environment, and repairs might take from a week
or less for a minor incident to six months or more for a major
interruption. Any event that interrupts the revenues generated
by ETPs operations, or which causes it to make significant
expenditures not covered by insurance, could reduce ETPs
cash available for paying distributions to its unitholders,
including us.
As a result of market conditions, premiums and deductibles for
certain insurance policies can increase substantially, and in
some instances, certain insurance may become unavailable or
available only for reduced amounts of coverage. As a result, ETP
may not be able to renew existing insurance policies or procure
other desirable insurance on commercially reasonable terms, if
at all. If ETP were to incur a significant liability for which
it was not fully insured, it could have a material adverse
effect on ETPs financial position and results of
operations. In addition, the proceeds of any such insurance may
not be paid in a timely manner and may be insufficient if such
an event were to occur.
Terrorist
attacks aimed at ETPs facilities could adversely affect
its business, results of operations, cash flows and financial
condition.
Since the September 11, 2001 terrorist attacks on the
United States, the United States government has issued warnings
that energy assets, including the nations pipeline
infrastructure, may be the future target of terrorist
organizations. Any terrorist attack on ETPs facilities or
pipelines or those of its customers could have a material
adverse effect on ETPs business.
Sudden
and sharp propane price increases that cannot be passed on to
customers may adversely affect ETPs profit
margins.
The propane industry is a margin-based business in
which gross profits depend on the excess of sales prices over
supply costs. As a result, ETPs profitability is sensitive
to changes in energy prices, and in particular, changes in
wholesale prices of propane. When there are sudden and sharp
increases in the wholesale cost of propane, ETP may be unable to
pass on these increases to its customers through retail or
wholesale prices. Propane is a commodity and the price ETP pays
for it can fluctuate significantly in response to changes in
supply or other market conditions over which ETP has no control.
In addition, the timing of cost pass-throughs can significantly
affect margins. Sudden and extended wholesale price increases
could reduce ETPs gross profits and could, if continued
over an extended period of time, reduce demand by encouraging
ETPs retail customers to conserve their propane usage or
convert to alternative energy sources.
ETPs
results of operations could be negatively impacted by price and
inventory risk related to its propane business and management of
these risks.
ETP generally attempts to minimize its cost and inventory risk
related to its propane business by purchasing propane on a
short-term basis under supply contracts that typically have a
one-year term and at a cost that fluctuates based on the
prevailing market prices at major delivery points. In order to
help ensure adequate supply sources are available during periods
of high demand, ETP may purchase large volumes of propane during
periods of low demand or low price, which generally occur during
the summer months, for storage in its facilities, at major
storage facilities owned by third parties or for future
delivery. This strategy may not be effective in limiting
ETPs cost and inventory risks if, for example, market,
weather or other conditions prevent or allocate the delivery of
physical product during periods of peak demand. If the market
price falls below the cost at which ETP made such purchases, it
could adversely affect its profits.
Some of ETPs propane sales are pursuant to commitments at
fixed prices. To mitigate the price risk related to ETPs
anticipated sales volumes under the commitments, ETP may
purchase and store physical
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product
and/or enter
into fixed price
over-the-counter
energy commodity forward contracts and options. Generally,
over-the-counter
energy commodity forward contracts have terms of less than one
year. ETP enters into such contracts and exercises such options
at volume levels that it believes are necessary to manage these
commitments. The risk management of ETPs inventory and
contracts for the future purchase of product could impair its
profitability if the customers do not fulfill their obligations.
ETP also engages in other trading activities, and may enter into
other types of
over-the-counter
energy commodity forward contracts and options. These trading
activities are based on ETP managements estimates of
future events and prices and are intended to generate a profit.
However, if those estimates are incorrect or other market events
outside of ETPs control occur, such activities could
generate a loss in future periods and potentially impair its
profitability.
ETP is
dependent on its principal propane suppliers, which increases
the risk of an interruption in supply.
During 2008, ETP purchased approximately 50.7%, 15.0% and 14.9%
of its propane from Enterprise Products Operating L.P., or
Enterprise, Targa Liquids and M.P. Oils, Ltd., respectively.
Enterprise is a subsidiary of Enterprise GP Holdings L.P., or
Enterprise GP, an entity that owns approximately 17.6% of
ETEs outstanding common units and a 40.6% non-controlling
equity interest in our general partner. Titan Energy Partners,
L.P., or Titan, purchases substantially all of its propane from
Enterprise pursuant to an agreement that expires in 2010. If
supplies from these sources were interrupted, the cost of
procuring replacement supplies and transporting those supplies
from alternative locations might be materially higher and, at
least on a short-term basis, margins could be adversely
affected. Supply from Canada is subject to the additional risk
of disruption associated with foreign trade such as trade
restrictions, shipping delays and political, regulatory and
economic instability.
Historically, a substantial portion of the propane that ETP
purchases originated from one of the industrys major
markets located in Mt. Belvieu, Texas and has been shipped to
ETP through major common carrier pipelines. Any significant
interruption in the service at Mt. Belvieu or other major market
points, or on the common carrier pipelines ETP uses, would
adversely affect its ability to obtain propane.
Competition
from alternative energy sources may cause ETP to lose propane
customers, thereby reducing its revenues.
Competition in ETPs propane business from alternative
energy sources has been increasing as a result of reduced
regulation of many utilities. Propane is generally not
competitive with natural gas in areas where natural gas
pipelines already exist because natural gas is a less expensive
source of energy than propane. The gradual expansion of natural
gas distribution systems and the availability of natural gas in
many areas that previously depended upon propane could cause ETP
to lose customers, thereby reducing its revenues. Fuel oil also
competes with propane and is generally less expensive than
propane. In addition, the successful development and increasing
usage of alternative energy sources could adversely affect
ETPs operations.
Energy
efficiency and technological advances may affect the demand for
propane and adversely affect ETPs operating
results.
The national trend toward increased conservation and
technological advances, including installation of improved
insulation and the development of more efficient furnaces and
other heating devices, has decreased the demand for propane by
retail customers. Stricter conservation measures in the future
or technological advances in heating, conservation, energy
generation or other devices could adversely affect ETPs
operations.
S-42
USE OF
PROCEEDS
We expect to receive net proceeds of approximately
$1.72 billion from the sale of notes offered hereby, after
deducting the underwriters discount and estimated offering
expenses.
We anticipate using approximately $124 million of the net
proceeds of this offering to repay all of the outstanding
indebtedness under our existing revolving credit facility and
approximately $1.45 billion of the net proceeds of this
offering to repay all indebtedness outstanding under our term
loan facility. In addition, we anticipate using the remaining
approximately $144 million of the net proceeds of this
offering to fund a portion of the estimated cost to terminate
interest rate swap agreements relating to these outstanding
borrowings. We anticipate funding the remaining
$14.3 million of estimated costs to terminate these
interest rate swap agreements with borrowings under our new
$200 million senior secured revolving credit facility,
which we will enter into contemporaneously with the consummation
of this offering and the repayment of outstanding indebtedness
under our existing revolving credit facility.
As of December 31, 2009, there was an aggregate of
approximately $124 million of borrowings outstanding under
our existing revolving credit facility and an aggregate of
approximately $1.45 billion of borrowings outstanding under
our term loan facility. The weighted average interest rate on
the total amount outstanding under our existing revolving credit
and term loan facilities at December 31, 2009 was 1.94%.
Our existing revolving credit facility matures on
February 8, 2011 and our term loan facility matures on
November 1, 2012.
S-43
CAPITALIZATION
The following table sets forth our consolidated cash and
capitalization as of September 30, 2009 on:
|
|
|
|
|
an actual basis;
|
|
|
|
an as adjusted basis to give effect to: (1) ETPs
public offering of 6,900,000 common units in October 2009 and
the related use of net proceeds of approximately
$275.3 million to repay amounts outstanding under the ETP
Credit Facility; (2) ETPs issuance of an aggregate of
2,079,593 common units under its equity distribution program in
November and December 2009 and the related use of net proceeds
of approximately $89.7 million to repay amounts outstanding
under the ETP Credit Facility; (3) Transwesterns
issuance of $350 million aggregate principal amount of
senior notes in December 2009, the proceeds from which were
ultimately used to repay amounts outstanding under the ETP
Credit Facility and for general partnership purposes; and
(4) ETPs public offering of 9,775,000 common units in
January 2010 and the related use of net proceeds of
approximately $422.9 million to repay amounts outstanding
under the ETP Credit Facility; and
|
|
|
|
an as further adjusted basis to give effect to the sale of the
notes and the application of the net proceeds therefrom as
described in Use of Proceeds.
|
The actual information in the table is derived from and should
be read in conjunction with our historical financial statements,
including the accompanying notes, included in our Annual Report
on
Form 10-K
for the year ended December 31, 2008, and our Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009, which are
incorporated by reference in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
As Further
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
Adjusted
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents(1)
|
|
$
|
50,192
|
|
|
$
|
703,201
|
|
|
$
|
703,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, including current maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt of Energy Transfer Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing $500 million Revolving Credit Facility
|
|
$
|
123,923
|
|
|
$
|
123,923
|
|
|
$
|
|
|
New $200 million Revolving Credit Facility
|
|
|
|
|
|
|
|
|
|
|
14,300
|
|
Term Loan Facility
|
|
|
1,450,000
|
|
|
|
1,450,000
|
|
|
|
|
|
2017 Notes offered hereby
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Notes offered hereby
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt of Energy Transfer Partners(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
$2,000 million ETP Revolving Credit Facility
|
|
|
483,265
|
|
|
|
|
|
|
|
|
|
ETP Senior Notes
|
|
|
5,050,000
|
|
|
|
5,050,000
|
|
|
|
5,050,000
|
|
Transwestern Senior Notes
|
|
|
520,000
|
|
|
|
870,000
|
|
|
|
870,000
|
|
HOLP Senior Secured Notes
|
|
|
144,912
|
|
|
|
144,912
|
|
|
|
144,912
|
|
Other long-term debt
|
|
|
27,159
|
|
|
|
27,159
|
|
|
|
27,159
|
|
Unamortized discounts
|
|
|
(13,009
|
)
|
|
|
(13,009
|
)
|
|
|
(13,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
7,786,250
|
|
|
|
7,652,985
|
|
|
|
7,843,362
|
|
Total Equity
|
|
|
2,753,663
|
|
|
|
3,541,519
|
|
|
|
3,541,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization
|
|
$
|
10,539,913
|
|
|
$
|
11,194,504
|
|
|
$
|
11,384,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009, ETE had cash and cash equivalents
(on a consolidated basis) of $68.3 million. |
|
(2) |
|
On February 29, 2008, MEP entered into a credit agreement
that provides for a $1.4 billion senior revolving credit
facility, which we refer to as the MEP Facility. ETP has
guaranteed 50% of the obligations of MEP under the MEP Facility,
with the remaining 50% of MEPs obligations guaranteed by
KMP. In |
S-44
|
|
|
|
|
September 2009, MEP issued $800 million of senior unsecured
notes and used the proceeds to repay indebtedness under the MEP
Facility. In November 2009, MEP entered into an amendment to the
credit agreement related to the MEP Facility in order to reduce
the borrowing capacity under the facility to
$275.0 million. As of December 31, 2009, there were
$29.5 million of outstanding borrowings and
$33.3 million of letters of credit issued under the MEP
Facility. |
|
(3) |
|
On November 13, 2009, FEP entered into a credit agreement
that provides for a $1.1 billion senior revolving credit
facility. ETP has guaranteed 50% of the obligations of FEP under
this facility, with the remaining 50% of FEPs obligations
guaranteed by KMP. As of December 31, 2009, there were
$355.0 million of outstanding borrowings under FEPs
senior revolving credit facility. |
S-45
SELECTED
FINANCIAL DATA
Currently, we have no separate operating activities apart from
those conducted by ETP. The table below reflects our
consolidated operations, including the operations of ETP and its
consolidated subsidiaries, except as indicated below.
In January 2004, we combined the natural gas midstream and
transportation operations of Energy Transfer Company, or ETC
OLP, with the retail propane operations of Heritage Propane
Partners, L.P., referred to as the Energy Transfer Transactions.
In March 2004, Heritage changed its name to Energy Transfer
Partners, L.P. Although Heritage was the surviving parent entity
for legal purposes in the Energy Transfer Transactions, ETC OLP
was the acquirer for accounting purposes. As a result, following
the Energy Transfer Transactions in January 2004, the historical
financial statements of ETC OLP for periods prior to the closing
of the Energy Transfer Transactions became our historical
financial statements. ETC OLP was formed on October 1, 2002
and has a December 31 year-end. ETC OLPs predecessor
entities had a December 31 year-end.
In November 2007, we changed our fiscal year end from August 31
to December 31 and, in connection with such change, we have
reported financial results for a four-month transition period
ended December 31, 2007.
For periods prior to 2009, certain prior period financial
statement amounts have been reclassified to conform to the 2009
presentation. These changes had no impact on net income or total
equity, with the exception of changes to the presentation of
noncontrolling interest resulting from the adoption of
Accounting Standards Codification
810-10-65,
which resulted in (i) the reclassification of
noncontrolling (minority) interest from liabilities to a
separate component of equity in our consolidated balance sheet,
(ii) the reclassification of minority interest expense to
net income attributable to noncontrolling interest in our
consolidated statement of operations, and (iii) the
reclassification of distributions to minority interests between
cash flow from operating activities and cash flow from financing
activities in our consolidated statement of cash flows.
The selected historical financial data should be read in
conjunction with the consolidated financial statements of Energy
Transfer Equity, L.P., incorporated by reference from each of
our Annual Report on
Form 10-K
for the year ended December 31, 2008 and our Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009, and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations. The amounts in the
table below, except per unit data, are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Years Ended August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrastate transportation and storage segment
|
|
$
|
1,589,298
|
|
|
$
|
4,862,641
|
|
|
$
|
5,634,604
|
|
|
$
|
1,254,401
|
|
|
$
|
3,915,932
|
|
|
$
|
5,013,224
|
|
|
$
|
2,608,108
|
|
|
$
|
113,938
|
|
Interstate transportation segment
|
|
|
203,349
|
|
|
|
176,663
|
|
|
|
244,224
|
|
|
|
76,000
|
|
|
|
178,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream segment
|
|
|
1,750,466
|
|
|
|
4,555,340
|
|
|
|
5,342,393
|
|
|
|
1,166,313
|
|
|
|
2,853,496
|
|
|
|
4,223,544
|
|
|
|
3,246,772
|
|
|
|
1,880,663
|
|
Eliminations
|
|
|
(540,075
|
)
|
|
|
(3,272,574
|
)
|
|
|
(3,568,065
|
)
|
|
|
(664,522
|
)
|
|
|
(1,562,199
|
)
|
|
|
(2,359,256
|
)
|
|
|
(471,255
|
)
|
|
|
(27,798
|
)
|
Retail propane and other retail propane related segment
|
|
|
902,471
|
|
|
|
1,162,941
|
|
|
|
1,624,010
|
|
|
|
511,258
|
|
|
|
1,284,867
|
|
|
|
879,556
|
|
|
|
709,473
|
|
|
|
349,344
|
|
Other
|
|
|
6,004
|
|
|
|
13,675
|
|
|
|
16,201
|
|
|
|
5,892
|
|
|
|
121,278
|
|
|
|
102,028
|
|
|
|
75,700
|
|
|
|
30,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,911,513
|
|
|
|
7,498,686
|
|
|
|
9,293,367
|
|
|
|
2,349,342
|
|
|
|
6,792,037
|
|
|
|
7,859,096
|
|
|
|
6,168,798
|
|
|
|
2,346,957
|
|
Gross margin
|
|
|
1,648,233
|
|
|
|
1,761,442
|
|
|
|
2,355,287
|
|
|
|
675,688
|
|
|
|
1,713,831
|
|
|
|
1,290,780
|
|
|
|
787,283
|
|
|
|
365,533
|
|
Depreciation and amortization
|
|
|
239,626
|
|
|
|
200,922
|
|
|
|
274,372
|
|
|
|
75,406
|
|
|
|
191,383
|
|
|
|
129,636
|
|
|
|
105,751
|
|
|
|
56,242
|
|
Operating income
|
|
|
744,630
|
|
|
|
846,133
|
|
|
|
1,098,903
|
|
|
|
316,651
|
|
|
|
809,336
|
|
|
|
575,540
|
|
|
|
297,921
|
|
|
|
130,806
|
|
Interest expense, net of interest capitalized
|
|
|
(341,050
|
)
|
|
|
(261,297
|
)
|
|
|
(357,541
|
)
|
|
|
(103,375
|
)
|
|
|
(279,986
|
)
|
|
|
(150,646
|
)
|
|
|
(101,061
|
)
|
|
|
(41,217
|
)
|
Gain on Energy Transfer Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395,253
|
|
Income before income tax expense
|
|
|
461,548
|
|
|
|
625,692
|
|
|
|
683,562
|
|
|
|
192,758
|
|
|
|
563,359
|
|
|
|
433,907
|
|
|
|
201,795
|
|
|
|
484,715
|
|
Income tax expense
|
|
|
5,773
|
|
|
|
6,600
|
|
|
|
3,808
|
|
|
|
9,949
|
|
|
|
11,391
|
|
|
|
23,015
|
|
|
|
4,397
|
|
|
|
2,792
|
|
Net income attributable to noncontrolling interest
|
|
|
152,893
|
|
|
|
266,614
|
|
|
|
304,710
|
|
|
|
90,132
|
|
|
|
232,608
|
|
|
|
303,752
|
|
|
|
162,242
|
|
|
|
37,869
|
|
Net income attributable to partners
|
|
|
302,882
|
|
|
|
352,478
|
|
|
|
375,044
|
|
|
|
92,677
|
|
|
|
319,360
|
|
|
|
107,140
|
|
|
|
146,746
|
|
|
|
450,217
|
|
S-46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Years Ended August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
858,411
|
|
|
|
1,779,940
|
|
|
|
1,180,995
|
|
|
|
1,403,796
|
|
|
|
1,050,578
|
|
|
|
1,302,735
|
|
|
|
1,453,730
|
|
|
|
481,868
|
|
Total assets
|
|
|
11,684,508
|
|
|
|
11,267,924
|
|
|
|
11,069,902
|
|
|
|
9,462,094
|
|
|
|
8,183,089
|
|
|
|
5,924,141
|
|
|
|
4,905,672
|
|
|
|
2,865,191
|
|
Current liabilities
|
|
|
882,387
|
|
|
|
1,322,535
|
|
|
|
1,208,921
|
|
|
|
1,241,433
|
|
|
|
932,815
|
|
|
|
1,020,787
|
|
|
|
1,244,785
|
|
|
|
404,917
|
|
Long-term debt, less current maturities
|
|
|
7,740,135
|
|
|
|
7,181,710
|
|
|
|
7,190,357
|
|
|
|
5,870,106
|
|
|
|
5,198,676
|
|
|
|
3,205,646
|
|
|
|
2,275,965
|
|
|
|
1,071,158
|
|
Total equity
|
|
|
2,753,663
|
|
|
|
47,969
|
|
|
|
2,339,316
|
|
|
|
2,091,156
|
|
|
|
1,835,300
|
|
|
|
1,484,878
|
|
|
|
1,123,998
|
|
|
|
1,171,545
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by operating activities
|
|
|
721,421
|
|
|
|
908,837
|
|
|
|
1,143,720
|
|
|
|
208,635
|
|
|
|
1,006,320
|
|
|
|
502,928
|
|
|
|
155,272
|
|
|
|
161,486
|
|
Cash flow used in investing activities
|
|
|
(1,225,719
|
)
|
|
|
(1,439,741
|
)
|
|
|
(2,015,585
|
)
|
|
|
(995,943
|
)
|
|
|
(2,158,090
|
)
|
|
|
(1,244,406
|
)
|
|
|
(1,131,117
|
)
|
|
|
(731,831
|
)
|
Cash flow provided by financing activities
|
|
|
462,467
|
|
|
|
1,100,479
|
|
|
|
907,331
|
|
|
|
766,515
|
|
|
|
1,202,916
|
|
|
|
734,223
|
|
|
|
926,452
|
|
|
|
598,125
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance (accrual basis)
|
|
|
71,766
|
|
|
|
75,931
|
|
|
|
140,966
|
|
|
|
48,998
|
|
|
|
89,226
|
|
|
|
51,826
|
|
|
|
41,054
|
|
|
|
22,514
|
|
Growth (accrual basis)
|
|
|
534,696
|
|
|
|
1,532,458
|
|
|
|
1,921,679
|
|
|
|
604,371
|
|
|
|
998,075
|
|
|
|
677,861
|
|
|
|
155,405
|
|
|
|
87,174
|
|
Acquisition
|
|
|
6,244
|
|
|
|
62,002
|
|
|
|
84,783
|
|
|
|
337,092
|
|
|
|
90,695
|
|
|
|
586,185
|
|
|
|
1,131,844
|
|
|
|
622,929
|
|
S-47
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our historical consolidated
financial condition and results of operations, and should be
read in conjunction with our historical consolidated financial
statements and accompanying notes thereto incorporated by
reference from each of our Annual Report on
Form 10-K
for the year ended December 31, 2008 and our Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009. This discussion
includes forward-looking statements that are subject to risk and
uncertainties. Actual results may differ substantially from the
statements we make in this section due to a number of factors
that are discussed in Risk Factors, included in this
prospectus supplement.
For periods prior to 2009, certain prior period financial
statement amounts have been reclassified to conform to the 2009
presentation. These changes had no impact on net income or total
equity, with the exception of changes to the presentation of
noncontrolling interest resulting from the adoption of
Accounting Standards Codification
810-10-65,
which resulted in (i) the reclassification of
noncontrolling (minority) interest from liabilities to a
separate component of equity in our consolidated balance sheet,
(ii) the reclassification of minority interest expense to
net income attributable to noncontrolling interest in our
consolidated statement of operations, and (iii) the
reclassification of distributions to minority interests between
cash flow from operating activities and cash flow from financing
activities in our consolidated statement of cash flows.
For more information regarding the specific construction
projects, pipelines and joint ventures referred to in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations, please see Business.
Overview
Currently, our business operations are conducted only through
ETPs operating subsidiaries, ETC OLP, a Texas limited
partnership engaged in midstream and intrastate transportation
and natural gas storage operations, Energy Transfer Interstate
Holdings, LLC, or ET Interstate, the parent company of
Transwestern, a Delaware limited liability company engaged in
interstate transportation of natural gas, and ETC Midcontinent
Express Pipeline, LLC, or ETC MEP, a Delaware limited liability
company engaged in interstate transportation of natural gas, and
Heritage Operating, L.P. , or HOLP, and Titan, both Delaware
limited partnerships engaged in retail propane operations.
Energy
Transfer Equity, L.P.
The principal sources of our cash flow are distributions we
receive from direct and indirect investments in limited and
general partner interests of ETP. Our primary cash requirements
are for general and administrative expenses, debt service and
distributions to our partners. ETEs assets and liabilities
are not available to satisfy the debts and other obligations of
ETP or its consolidated subsidiaries.
In order to fully understand our financial condition and results
of operations on a stand-alone basis, we have included
discussions of our matters apart from those of our consolidated
group.
Energy
Transfer Partners, L.P.
Our primary objective is to increase the level of our cash
distributions to our partners over time by pursuing a business
strategy that is currently focused on growing ETPs natural
gas midstream and intrastate transportation and storage
businesses (including transportation, gathering, compression,
treating, processing, storage and marketing) and its propane
business through, among other things, pursuing certain
construction and expansion opportunities relating to ETPs
existing infrastructure and acquiring certain additional
businesses or assets. The actual amount of cash that ETP will
have available for distribution will primarily depend on the
amount of cash it generates from operations.
During the past several years ETP has been successful in
completing several transactions that have been accretive to its
unitholders. First and foremost was the completion of the Energy
Transfer Transactions, which was the combination of the retail
propane operations of Heritage Propane Partners, L.P. and the
midstream and
S-48
intrastate transportation and storage operations of ETC OLP in
January 2004. Subsequent to this combination, ETP has made
numerous significant acquisitions of assets totaling
$3.9 billion in its natural gas operations and
$0.9 billion in its propane operations.
ETP has also made, and continues to make, significant
investments in internal growth projects, primarily the
construction of pipelines, gathering systems and natural gas
treating and processing plants, which it believes will provide
additional cash flow to its unitholders for years to come. From
September 1, 2003 through September 30, 2009, ETP made
growth capital expenditures, excluding capital contributions
made in connection with the MEP and FEP joint ventures, of
approximately $5.0 billion, of which more than
$4.3 billion was related to natural gas transmission
pipelines. ETP expects its fee-based revenue to increase as a
result of the completion of recent pipeline expansions to its
existing natural gas system in addition to projects expected to
be completed in the next 12 to 18 months. These projects
include FEP and the Tiger pipeline.
ETPs
Operations
ETPs principal operations are conducted in the following
reportable segments:
|
|
|
|
|
Intrastate transportation and storage Revenue is
typically generated from fees charged to customers to reserve
firm capacity on or move gas through the pipeline on an
interruptible basis. A monetary fee
and/or fuel
retention are also components of the fee structure. Excess fuel
retained after consumption is typically valued based on the
published market prices as of the first of the month and sold at
market prices. The HPL System also generates revenue from the
sale of natural gas to electric utilities, independent power
plants, local distribution companies, industrial end-users and
other marketing companies. The use of the Bammel storage
reservoir allows ETP to purchase physical natural gas and then
sell financial contracts at a price sufficient to cover its
carrying costs and provide a gross profit margin, in addition to
generating revenue from fee-based contracts to reserve firm
storage capacity.
|
|
|
|
Interstate transportation Revenue is primarily
generated from fees earned from natural gas transportation
services and operational gas sales.
|
|
|
|
Midstream Revenue is primarily generated by the
volumes of natural gas gathered, compressed, treated, processed,
transported, purchased and sold through our pipelines (excluding
the transportation pipelines) and gathering systems as well as
the level of natural gas and NGL prices.
|
|
|
|
Retail propane Revenue is generated from the sale of
propane and propane-related products and services.
|
Trends
and Outlook
In light of the current conditions in the capital markets, and
based on ETPs projected growth capital expenditures and
capital contributions to joint venture entities, ETP has taken
significant steps to preserve its liquidity position, reducing
discretionary capital expenditures and continuing to manage
operating and administrative costs. During the nine months ended
September 30, 2009, ETP received approximately
$578.3 million in net proceeds from its January and April
common unit offerings and $993.6 million in net proceeds
from an offering of $1.0 billion of aggregate principal
amount of ETP senior notes in April. As of September 30,
2009, in addition to approximately $50.1 million of cash on
hand, ETP had available capacity under the ETP Credit Facility
of approximately $1.45 billion. In addition, ETP received
approximately $275.3 million in net proceeds from its
October common unit offering and approximately
$422.9 million in net proceeds from its January 2010 common
unit offering. Based on current estimates, ETP expects to
utilize these resources, along with cash from operations, to
fund ETPs announced growth capital expenditures and
working capital needs without ETP having the need to access the
capital markets again until the latter half of 2010; however,
ETP may issue debt or equity securities prior to that time as it
deems prudent to provide liquidity for new capital projects or
other partnership purposes.
As noted above and despite the economic challenges and volatile
capital markets, ETP has successfully raised approximately
$3.0 billion in proceeds from the recent debt and equity
offerings since December 1,
S-49
2008, which includes $89.7 million in net proceeds from
issuances under ETPs equity distribution program during
November and December 2009. We believe that the size and scope
of ETPs operations, ETPs stable asset base and cash
flow profile and ETPs investment grade status will be
significant positive factors in our and ETPs efforts to
obtain new debt or equity funding; however, there is no
assurance that we or ETP will continue to be successful in
obtaining financing under any of the alternatives discussed
above if the capital markets deteriorate further from current
conditions. Furthermore, the terms, size and cost of any one of
these financing alternatives could be less favorable and could
be impacted by the timing and magnitude of our funding
requirements, market conditions and other uncertainties.
ETPs natural gas transportation and midstream revenues are
derived significantly from companies that engage in natural gas
exploration and production activities. Prices for natural gas
and NGLs have fallen dramatically since July 2008 and have
remained at low levels due to the continued effects of the
economic recession and higher than normal storage levels. Many
of ETPs customers have been negatively impacted by these
recent declines in natural gas prices as well as current
conditions in the capital markets. These factors have caused
several of ETPs customers to decrease drilling levels and,
in some cases, to shut in or consider shutting in natural gas
production from some producing wells.
In ETPs intrastate and interstate natural gas operations,
a significant portion of its revenue is derived from long-term
fee-based arrangements pursuant to which its customers pay
capacity reservation charges regardless of the volume of natural
gas transported; however, a portion of ETPs revenue is
derived from charges based on actual volumes transported in
addition to the excess of fuel retention charged to its
customers after consumption. As a result, ETPs operating
cash flows from its natural gas pipeline operations are not tied
directly to natural gas and NGL prices; however, the volumes of
natural gas ETP transports may be adversely affected by reduced
drilling activity of its customers, as well as the shutting in
of production from producing wells, as a result of lower natural
gas prices. As a portion of ETPs pipeline transportation
revenue is based on volumes transported and fuel retention,
lower volumes of natural gas transported and lower natural gas
prices generally result in lower revenue from its intrastate and
interstate natural gas operations. During 2009, natural gas spot
prices ranged from $1.925 per MMbtu to $5.955 per MMbtu, and the
closing price on the NYMEX on January 11, 2010 for natural
gas to be delivered in February 2010 was $5.454 per MMbtu. As a
result, drilling activity in ETPs core operating areas has
declined and natural gas producers have shut in production from
some wells, which in turn has resulted in lower than expected
natural gas volumes transported on ETPs intrastate and
interstate pipelines. There are no assurances that commodity
prices will not decline further, which could result in a further
reduction in drilling activities by ETPs customers.
Since certain of ETPs natural gas marketing operations and
substantially all of its propane operations involve the purchase
and resale of natural gas and NGLs, ETP expects its revenues and
costs of products sold to be lower than prior periods if
commodity prices remain at or fall below existing levels.
However, ETP does not expect its margins from these activities
to be significantly impacted as ETP typically purchases the
commodity at a lower price than the sales price. Since the
prices of natural gas and NGLs have been volatile, there are no
assurances that ETP will ultimately sell the commodity for a
profit.
Current economic conditions also indicate that many of
ETPs customers may encounter increased credit risk in the
near term. ETP actively monitors the credit status of its
counterparties, performing both quantitative and qualitative
assessments based on their credit ratings and credit default
swaps where applicable, and to date have not had any significant
credit losses associated with its transactions. However, given
the current volatility in the financial markets, ETP cannot be
certain that it will not experience such losses in the future.
Results
of Operations
The following is a discussion of our historical consolidated
financial condition and results of operations, and should be
read in conjunction with our historical consolidated financial
statements and accompanying notes thereto incorporated by
reference from each of our Annual Report on
Form 10-K
for the year ended December 31, 2008 and our Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009.
In November 2007, we changed our fiscal year end to the calendar
year end. Thus, our current fiscal year began on January 1,
2009. We completed a four-month transition period that began
September 1, 2007 and
S-50
ended December 31, 2007 and filed a transition report on
Form 10-Q
for that period in February 2008. We subsequently filed audited
financial statements for the four-month transition period on
Form 8-K
on March 19, 2008. The results of operations contained
herein cover the year ended August 31, 2007, the year ended
December 31, 2008 and the nine months ended
September 30, 2009.
We did not recast the financial data for the prior fiscal
periods because the financial reporting processes in place at
that time included certain procedures that were completed only
on a fiscal quarterly basis. Consequently, to recast those
periods would have been impractical and would not have been
cost-justified. Comparability between periods is impacted
primarily by weather, fluctuations in commodity prices, volumes
of natural gas sold and transported, hedging strategies and the
use of financial instruments, trading activities, basis
differences between market hubs and interest rates. We believe
that the trends indicated by comparison of the results for the
calendar year ended December 31, 2008 are substantially
similar to what is reflected in the information for the fiscal
year ended August 31, 2007.
Historically, the comparability of our consolidated financial
statements is affected by fluctuation in natural gas prices,
mainly due to natural gas sales and purchases on ETPs HPL
system. Since ETP buys and sells natural gas primarily based on
either first of month index prices, gas daily average prices or
a combination of both, ETPs gas sales and purchases tend
to be higher when natural gas prices are high and its gas sales
and purchases tend to be lower when natural gas prices are
lower. However, a change in natural gas prices is only one of
several elements that impact ETPs overall margin. Other
factors include, but are not limited to, volumetric changes,
hedging strategies and the use of financial instruments,
fee-based revenues, and basis differences between market hubs.
Due to the high level of market volatility experienced in 2008,
as well as other business considerations, ETP ceased its
speculative trading activities in July 2008. As a result, ETP
will no longer have any material exposure to market risk from
these activities. Trading activities resulted in net losses of
approximately $26.2 million for the year ended
December 31, 2008, and net gains of approximately
$2.2 million for the fiscal year ended August 31, 2007.
Nine Months Ended September 30, 2009 Compared to Nine
Months Ended September 30, 2008 (tabular dollar amounts are
expressed in thousands)
ETE
Stand-alone Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Equity in earnings of affiliates
|
|
$
|
370,195
|
|
|
$
|
441,299
|
|
|
$
|
(71,104
|
)
|
Selling, general and administrative expenses
|
|
|
(3,608
|
)
|
|
|
(4,523
|
)
|
|
|
915
|
|
Interest expense
|
|
|
(56,728
|
)
|
|
|
(69,527
|
)
|
|
|
12,799
|
|
Losses on non-hedged interest rate derivatives
|
|
|
(7,954
|
)
|
|
|
(13,759
|
)
|
|
|
5,805
|
|
Other, net
|
|
|
329
|
|
|
|
(993
|
)
|
|
|
1,322
|
|
Equity in Earnings of Affiliates. Equity in
earnings of affiliates represents our earnings related to our
investment in limited partner units of ETP, our ownership of ETP
GP and our ownership of ETP LLC. The decrease in equity in
earnings of affiliates was directly related to the changes in
the ETP segment income described below.
Interest Expense. Our interest expense
decreased primarily due to a decrease in the LIBOR rate between
the periods.
Gains (Losses) on Non-Hedged Interest Rate
Derivatives. We have interest swaps that are not
accounted for as hedges under SFAS 133 (which is now
incorporated into ASC 815). Changes in the fair value of these
swaps are recorded directly in earnings. The variable portion of
these swaps is based on the three month LIBOR and its
corresponding forward curve. Increases or decreases in gains
(losses) on non-hedged interest rate derivatives are due to
changes in these rates. We recorded unrealized losses on our
interest rate swaps as a result of decreases in the relevant
floating index rates during the periods presented.
S-51
Consolidated
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Revenues
|
|
$
|
3,911,513
|
|
|
$
|
7,498,686
|
|
|
$
|
(3,587,173
|
)
|
Cost of products sold
|
|
|
2,263,280
|
|
|
|
5,737,244
|
|
|
|
(3,473,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,648,233
|
|
|
|
1,761,442
|
|
|
|
(113,209
|
)
|
Operating expenses
|
|
|
517,337
|
|
|
|
573,606
|
|
|
|
(56,269
|
)
|
Depreciation and amortization
|
|
|
239,626
|
|
|
|
200,922
|
|
|
|
38,704
|
|
Selling, general and administrative
|
|
|
146,640
|
|
|
|
140,781
|
|
|
|
5,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
744,630
|
|
|
|
846,133
|
|
|
|
(101,503
|
)
|
Interest expense, net of interest capitalized
|
|
|
(341,050
|
)
|
|
|
(261,297
|
)
|
|
|
(79,753
|
)
|
Equity in earnings (losses) of affiliates
|
|
|
11,751
|
|
|
|
(749
|
)
|
|
|
12,500
|
|
Gains (losses) on disposal of assets
|
|
|
(1,333
|
)
|
|
|
1,584
|
|
|
|
(2,917
|
)
|
Gains (losses) on non-hedged interest rate derivatives
|
|
|
24,373
|
|
|
|
(13,610
|
)
|
|
|
37,983
|
|
Allowance for equity funds used during construction
|
|
|
18,618
|
|
|
|
45,275
|
|
|
|
(26,657
|
)
|
Other, net
|
|
|
4,559
|
|
|
|
8,356
|
|
|
|
(3,797
|
)
|
Income tax expense
|
|
|
(5,773
|
)
|
|
|
(6,600
|
)
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
455,775
|
|
|
$
|
619,092
|
|
|
$
|
(163,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the detailed discussion of revenues, cost of products sold,
margin and operating expense by operating segment below.
Interest Expense. Interest expense increased
principally due to higher levels of borrowings, which were used
to finance growth capital expenditures primarily in ETPs
intrastate transportation and storage and interstate
transportation segments, including capital contributions to its
joint ventures. Interest expense is presented net of capitalized
interest and allowance for debt funds used during construction,
which totaled $15.5 million and $24.3 million for the
nine months ended September 30, 2009 and 2008, respectively.
Equity in Earnings (Losses) of Affiliates. The
increase in equity in earnings of affiliates for the nine month
period was primarily attributable to earnings of MEP during the
nine months ended September 30, 2009, for which ETP
recorded $8.8 million.
Gains (Losses) on Non-Hedged Interest Rate
Derivatives. ETP has interest swaps that are not
accounted for as hedges under SFAS 133 (which is now
incorporated into ASC 815). Changes in the fair value of these
swaps are recorded directly in earnings. The variable portion of
these swaps is based on the three month LIBOR and its
corresponding forward curve. Increases or decreases in gains
(losses) on non-hedged interest rate derivatives are due to
changes in these rates.
Allowance for Equity Funds Used During
Construction. The decrease in allowance for
equity funds used during construction, or AFUDC, on equity was
due to the completion of the Phoenix pipeline expansion project
in February 2009. AFUDC on equity amounts recorded in property,
plant and equipment were $11.4 million and
$27.7 million for the nine months ended September 30,
2009 and 2008, respectively.
Other Income, Net. The decrease between the
nine month periods was primarily due to contributions in aid of
construction, which exceeded our project costs during the nine
months ended September 30, 2008.
Segment
Operating Results
We evaluate segment performance based on operating income, which
we believe is an important performance measure of the core
profitability of our operations. This measure represents the
basis of our internal financial reporting and is one of the
performance measures used by senior management in deciding how
to allocate capital resources among business segments.
S-52
Operating income by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Intrastate transportation and storage
|
|
$
|
404,217
|
|
|
$
|
547,931
|
|
|
$
|
(143,714
|
)
|
Interstate transportation
|
|
|
101,755
|
|
|
|
91,414
|
|
|
|
10,341
|
|
Midstream
|
|
|
93,646
|
|
|
|
154,561
|
|
|
|
(60,915
|
)
|
Retail propane and other retail propane related
|
|
|
152,079
|
|
|
|
61,705
|
|
|
|
90,374
|
|
Other
|
|
|
(4,803
|
)
|
|
|
(904
|
)
|
|
|
(3,899
|
)
|
Unallocated selling, general and administrative expenses
|
|
|
(2,264
|
)
|
|
|
(8,574
|
)
|
|
|
6,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
744,630
|
|
|
$
|
846,133
|
|
|
$
|
(101,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Selling, General and Administrative
Expenses. Selling, general and administrative
expenses are allocated monthly to ETPs subsidiaries using
the Modified Massachusetts Formula Calculation. The expenses
subject to allocation are based on estimated amounts and take
into consideration actual expenses from previous months and
known trends. The difference between the allocation and actual
costs is adjusted in the following month, which results in over
or under allocation of these costs due to timing differences.
Intrastate
Transportation and Storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Natural gas MMBtu/d transported
|
|
|
12,769,022
|
|
|
|
10,515,132
|
|
|
|
2,253,890
|
|
Natural gas MMBtu/d sold
|
|
|
879,861
|
|
|
|
1,556,524
|
|
|
|
(676,663
|
)
|
Revenues
|
|
$
|
1,589,298
|
|
|
$
|
4,862,641
|
|
|
$
|
(3,273,343
|
)
|
Cost of products sold
|
|
|
895,433
|
|
|
|
3,965,931
|
|
|
|
(3,070,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
693,865
|
|
|
|
896,710
|
|
|
|
(202,845
|
)
|
Operating expenses
|
|
|
155,461
|
|
|
|
227,026
|
|
|
|
(71,565
|
)
|
Depreciation and amortization
|
|
|
84,288
|
|
|
|
66,502
|
|
|
|
17,786
|
|
Selling, general and administrative
|
|
|
49,899
|
|
|
|
55,251
|
|
|
|
(5,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
404,217
|
|
|
$
|
547,931
|
|
|
$
|
(143,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin. Intrastate transportation and
storage gross margin decreased between the nine month periods
primarily due to the following factors:
|
|
|
|
|
As mentioned above, ETPs fuel retention revenues are
directly impacted by changes in natural gas prices and volumes.
Due to the increased transportation volumes discussed above,
fuel retention margins increased approximately
$32.0 million compared to the prior period. However,
natural gas prices for retained fuel decreased from an average
of $8.99/MMBtu during the nine months ended September 30,
2008 to $3.25/MMBtu during the nine months ended
September 30, 2009 resulting in a decrease to the retention
margin of $179.0 million.
|
|
|
|
ETP experienced a net decrease in storage margin of
$87.5 million primarily due to a decrease in realized
margin of $87.9 million as a result of a 24.7 Bcf
decrease in natural gas sold between the periods from its Bammel
storage facility. In addition, ETP experienced fluctuations
related to its storage-related derivative activities that
resulted in a net increase of $0.4 million. During the 2008
period and the first three months of 2009, ETP accounted for
certain of its storage-related derivative instruments using
mark-to-market
accounting with changes in the value of these financial
derivative instruments being recorded directly in earnings.
During the nine months ended September 30, 2008, ETP
recognized unrealized gains of $23.1 million from
mark-to-market
adjustments and realized losses
|
S-53
|
|
|
|
|
of $5.7 million from the settlement of derivative
contracts. During the three months ended March 31, 2009,
ETP recognized $66.3 million in net gains from
mark-to-market
adjustments and the settlement of storage-related derivative
contracts primarily due to expected natural gas withdrawals that
were ultimately deferred. Beginning in April 2009, ETP elected
fair value hedge accounting for certain storage-related
transactions and recognized $3.5 million in realized gains
from the settlement of derivative contracts and
$2.1 million in unrealized gains from inventory fair value
adjustments related to changes in the spot prices for natural
gas and changes in value of the financial derivatives associated
with storage during the nine months ended September 30,
2009. In addition, during the nine months ended
September 30, 2009, ETP recognized $54.0 million in
unrealized losses as a result of a non-cash lower of cost or
market write-down of its natural gas inventory.
|
|
|
|
|
|
Transportation fees increased approximately $84.8 million
primarily due to increased volumes through ETPs
transportation pipelines. Overall volumes on ETPs
transportation pipelines were higher principally due to
increased capacity of its pipeline system as a result of the
completion of the Paris Loop, Maypearl to Malone pipeline,
Carthage Loop, Southern Shale pipeline, Cleburne to Tolar
pipeline and the Katy expansion during 2008 and 2009.
|
|
|
|
In addition to the above factors, ETP experienced a reduction in
margin of $53.1 million as compared to the prior period
principally due to the decrease in natural gas sold as a result
of lower natural gas prices, lower west to east price
differentials, and lower demand from industrial end users and
local distribution companies.
|
Operating Expenses. Intrastate transportation
and storage operating expenses decreased between the nine month
periods primarily due to a decrease in consumption expense of
$82.6 million, which was principally caused by lower
natural gas prices between periods despite increases in volumes
transported, and a decrease in electricity costs of
approximately $6.6 million. Offsetting the decrease were
increases in ad valorem taxes of $12.9 million resulting
from increased property values, and pipeline maintenance
expenses of approximately $5.0 million.
Depreciation and Amortization. Intrastate
transportation and storage depreciation and amortization expense
increased between the nine month periods primarily due to the
completion of pipeline expansion projects as noted above.
Selling, General and
Administrative. Intrastate transportation and
storage selling, general and administrative expenses decreased
between the nine month periods primarily due to decreased
employee-related costs (including allocated overhead expenses)
of approximately $8.9 million offset by an increase in
professional fees of approximately $3.7 million during the
period.
Interstate
Transportation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Natural gas MMBtu/d transported
|
|
|
1,706,199
|
|
|
|
1,750,592
|
|
|
|
(44,393
|
)
|
Natural gas MMBtu/d sold
|
|
|
19,481
|
|
|
|
13,094
|
|
|
|
6,387
|
|
Revenues
|
|
$
|
203,349
|
|
|
$
|
176,663
|
|
|
$
|
26,686
|
|
Operating expenses
|
|
|
46,427
|
|
|
|
39,128
|
|
|
|
7,299
|
|
Depreciation and amortization
|
|
|
36,017
|
|
|
|
28,204
|
|
|
|
7,813
|
|
Selling, general and administrative
|
|
|
19,150
|
|
|
|
17,917
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
101,755
|
|
|
$
|
91,414
|
|
|
$
|
10,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Interstate revenues increased
between the nine month periods by approximately
$26.7 million due to a $38.5 million increase related
to increased transported natural gas volumes primarily as a
result of the completion of the Phoenix pipeline expansion in
February 2009 partially offset by a $11.8 million decrease
in operational sales primarily due to decreased natural gas
prices between the periods. Transported volumes
S-54
decreased as compared to the prior period primarily as a result
of less favorable pricing differentials between the
San Juan and Permian Basins during the period.
Operating Expenses. Interstate operating
expenses increased between the nine month periods primarily due
to an increase in ad valorem taxes of approximately
$4.0 million resulting from increased property values and a
net increase in other operating expenses of $3.3 million
primarily due to the Phoenix pipeline expansion noted above.
Depreciation and Amortization. Interstate
depreciation and amortization expense increased between the nine
month periods primarily due to incremental depreciation
associated with the completion of the San Juan Lateral and
Phoenix pipeline expansion projects.
Selling, General and
Administrative. Interstate selling, general and
administrative expenses increased between the nine month periods
primarily due to an increase in allocated overhead expenses and
professional fees.
Midstream
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Natural gas MMBtu/d sold
|
|
|
1,009,547
|
|
|
|
1,361,295
|
|
|
|
(351,748
|
)
|
NGLs Bbls/d sold
|
|
|
40,345
|
|
|
|
27,618
|
|
|
|
12,727
|
|
Revenues
|
|
$
|
1,750,466
|
|
|
$
|
4,555,340
|
|
|
$
|
(2,804,874
|
)
|
Cost of products sold
|
|
|
1,510,030
|
|
|
|
4,271,788
|
|
|
|
(2,761,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
240,436
|
|
|
|
283,552
|
|
|
|
(43,116
|
)
|
Operating expenses
|
|
|
50,858
|
|
|
|
50,792
|
|
|
|
66
|
|
Depreciation and amortization
|
|
|
54,749
|
|
|
|
46,960
|
|
|
|
7,789
|
|
Selling, general and administrative
|
|
|
41,183
|
|
|
|
31,239
|
|
|
|
9,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
93,646
|
|
|
$
|
154,561
|
|
|
$
|
(60,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin. Midstream gross margin decreased
between the nine month periods primarily due to a decrease in
processing margin of $75.3 million offset by an increase in
fee-based revenue of $8.0 million. The increase from
ETPs fee-based revenue was primarily due to its Canyon
pipeline assets and the increase in NGL take-away capacity at
its Godley plant, allowing ETP to charge additional processing
fees. The decrease in processing margins was primarily due to
less favorable processing conditions during the 2009 period. The
decrease in the volumes of natural gas sold was primarily due to
less favorable market conditions as compared to the prior period
and the increase in NGL volumes sold was due to increased
capacity to deliver NGL volumes at ETPs Godley plant
starting in January 2009. ETP also experienced a favorable
change in marketing activity between the periods of
approximately $28.3 million due to the cessation of trading
activity noted above offset by an unfavorable change of
$4.1 million in other marketing activities resulting from
unfavorable market conditions during the period.
Operating Expenses. Midstream operating
expenses increased between the nine month periods primarily due
to increases in ad valorem taxes of $2.7 million and
electricity expenses of $1.0 million. These increases were
offset by a decrease in plant operating expenses of
$1.2 million and a net decrease of approximately
$2.5 million in other operating expenses.
Depreciation and Amortization. Midstream
depreciation and amortization expense increased between the nine
month periods primarily due to incremental depreciation from the
continued expansion of ETPs Godley plant.
Selling, General and Administrative. Midstream
selling, general and administrative expenses increased between
the nine month periods primarily due to an increase in
professional fees of $8.4 million and the increase in
ETPs accrual of $10.0 million related to the FERC
matter during the third quarter of 2009. This increase was
partially offset by a net decrease in employee related costs
(including allocated overhead expenses) of approximately
$8.5 million.
S-55
Retail
Propane and Other Retail Propane Related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Retail propane gallons (in thousands)
|
|
|
398,202
|
|
|
|
422,109
|
|
|
|
(23,907
|
)
|
Retail propane revenues
|
|
$
|
829,901
|
|
|
$
|
1,086,417
|
|
|
$
|
(256,516
|
)
|
Other retail propane related revenues
|
|
|
72,570
|
|
|
|
76,524
|
|
|
|
(3,954
|
)
|
Retail propane cost of products sold
|
|
|
378,524
|
|
|
|
744,316
|
|
|
|
(365,792
|
)
|
Other retail propane related cost of products sold
|
|
|
14,495
|
|
|
|
17,099
|
|
|
|
(2,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
509,452
|
|
|
|
401,526
|
|
|
|
107,926
|
|
Operating expenses
|
|
|
259,768
|
|
|
|
253,193
|
|
|
|
6,575
|
|
Depreciation and amortization
|
|
|
63,477
|
|
|
|
58,828
|
|
|
|
4,649
|
|
Selling, general and administrative
|
|
|
34,128
|
|
|
|
27,800
|
|
|
|
6,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
152,079
|
|
|
$
|
61,705
|
|
|
$
|
90,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes. Retail propane volumes decreased
primarily due to the continued effects of customer conservation,
the impact of the economic recession and, to a lesser extent,
the decline in new home construction. These decreases were
partially offset by the volume increases from acquisitions that
are not included in the comparative periods. ETP uses
information gathered on temperatures based on heating degree
days to also analyze its volume sales. Weather conditions can
have a significant impact to the demand for propane volumes
sales during the heating season, but temperatures during the
nine months ended September 30, 2009 were only slightly
colder than normal and were slightly warmer than the same period
in 2008.
Gross Margin. Total gross margin increased
between the nine month periods primarily due to ETPs
ability to maintain a slower pace of decreasing selling prices
despite a significant decrease in the wholesale market price of
propane and the impact of
mark-to-market
accounting of our financial instruments. ETPs average cost
per gallon of propane was approximately 45.0% lower during the
nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008. To hedge a
significant portion of its propane sales commitments, ETP
utilizes financial instruments as purchase commitments to lock
in the margins. Prior to April 2009, these financial instruments
were not designated as hedges for accounting purposes, and
changes in market value were recorded in cost of products sold
in the condensed consolidated statements of operations. During
the nine months ended September 30, 2009, ETPs
propane margins were positively impacted by sales made to retail
customers with whom ETP had previously entered into sales
commitments, while the settlement of financial instruments
related to those sales resulted in the realization of
$42.6 million of losses that had previously been recognized
in 2008.
Operating Expenses. The primary factors that
affected ETPs operating expenses for the nine months ended
September 30, 2009 were an increase in its operational
employee incentive program of $9.2 million due to more
favorable results achieved during the nine months ended
September 30, 2009 as compared to the prior period and an
increase in employee wages and benefits of $6.4 million due
to an increase related to additional employees from acquisitions
completed after September 30, 2008, fiscal year merit
increases given October 2008, and an increase in medical costs.
ETPs business insurance reserves and claims also increased
$2.9 million for the nine months ended September 20,
2009 as compared to the prior period. These increases are
primarily due to increases in insurance claims coupled with
rising insurance costs. Other propane operating expenses also
increased slightly due to the additional operating expenses from
acquisitions made since September 30, 2008; however, these
increases were largely offset by cost control initiatives from
ETPs operations and by a decrease of $9.1 million in
the vehicle fuel used for delivery to customers due to the
significant decline in fuel prices between the periods.
Depreciation and Amortization. The increase in
depreciation and amortization expense for the nine month periods
was primarily related to assets added through acquisitions made
after September 30, 2008.
Selling, General and Administrative. The
increase in selling, general and administrative expenses between
periods was primarily due to increased administrative expense
allocations of $1.8 million and
S-56
$5.3 million for the nine month periods, respectively,
offset by a reduction in other non-recurring expenses incurred
during the prior periods.
Year Ended December 31, 2008 Compared to the Year Ended
August 31, 2007 (tabular dollar amounts are expressed in
thousands)
ETE
Stand-alone Results
The following table summarizes the key components of our
stand-alone results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
|
|
|
December 31, 2008
|
|
August 31, 2007
|
|
Change
|
|
Equity in earnings of affiliates
|
|
$
|
551,835
|
|
|
$
|
435,247
|
|
|
$
|
116,588
|
|
Selling, general and administrative expenses
|
|
|
6,453
|
|
|
|
8,496
|
|
|
|
(2,043
|
)
|
Interest expense
|
|
|
91,822
|
|
|
|
104,405
|
|
|
|
(12,583
|
)
|
Losses on non-hedged interest rate derivatives
|
|
|
(77,435
|
)
|
|
|
(1,952
|
)
|
|
|
(75,483
|
)
|
Other, net
|
|
|
(1,056
|
)
|
|
|
(405
|
)
|
|
|
(651
|
)
|
The following is a discussion of the highlights of our
stand-alone results of operations for the periods presented.
Equity in Earnings of Affiliates. The increase
in equity in earnings of affiliates was directly related to the
changes in the ETP segment income described below.
Interest Expense. Our interest expense
decreased primarily due to a decrease in the LIBOR rate between
the periods.
Gains (Losses) on Non-Hedged Interest Rate
Derivatives. We had interest swaps with a
notional amount of $800.0 million that are not accounted
for as hedges. Changes in the fair value of these swaps are
recorded directly in earnings. The variable portion of these
swaps are based on the three month LIBOR and its corresponding
forward curve. A decrease in these rates between the comparable
periods resulted in decreases in the swaps fair value and
settlement amounts during the year ended December 31, 2008
compared with the year ended August 31, 2007.
Consolidated
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31, 2008
|
|
|
August 31, 2007
|
|
|
Change
|
|
|
Revenues
|
|
$
|
9,293,367
|
|
|
$
|
6,792,037
|
|
|
$
|
2,501,330
|
|
Cost of products sold
|
|
|
6,938,080
|
|
|
|
5,078,206
|
|
|
|
1,859,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
2,355,287
|
|
|
|
1,713,831
|
|
|
|
641,456
|
|
Operating expenses
|
|
|
781,831
|
|
|
|
559,600
|
|
|
|
222,231
|
|
Depreciation and amortization
|
|
|
274,372
|
|
|
|
191,383
|
|
|
|
82,989
|
|
Selling, general and administrative
|
|
|
200,181
|
|
|
|
153,512
|
|
|
|
46,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,098,903
|
|
|
|
809,336
|
|
|
|
289,567
|
|
Interest expense, net of interest capitalized
|
|
|
(357,541
|
)
|
|
|
(279,986
|
)
|
|
|
(77,555
|
)
|
Equity in earnings (losses) of affiliates
|
|
|
(165
|
)
|
|
|
5,161
|
|
|
|
(5,326
|
)
|
Gain (loss) on disposal of assets
|
|
|
(1,303
|
)
|
|
|
(6,310
|
)
|
|
|
5,007
|
|
Gains (losses) on non-hedged interest rate derivatives
|
|
|
(128,423
|
)
|
|
|
29,081
|
|
|
|
(157,504
|
)
|
Allowance for equity funds used during construction
|
|
|
63,976
|
|
|
|
4,948
|
|
|
|
59,028
|
|
Other, net
|
|
|
8,115
|
|
|
|
1,129
|
|
|
|
6,986
|
|
Income tax expense
|
|
|
(3,808
|
)
|
|
|
(11,391
|
)
|
|
|
7,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
679,754
|
|
|
$
|
551,968
|
|
|
$
|
127,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-57
See the detailed discussion of revenues, cost of products sold,
gross margin and operating expense by operating segment below.
Interest Expense. Interest expense increased
principally due to higher levels of borrowings which were used
to finance growth capital expenditures in ETPs intrastate
transportation and storage and interstate transportation
operations.
Equity in Earnings (Losses) of Affiliates. The
decrease in equity in earnings (losses) of affiliates is
primarily due to the recognition of $5.1 million of equity
income from ETPs 50% ownership of CCE Holdings, LLC,
or CCEH, during September 1, 2006 through December 1,
2006. ETP redeemed its investment in CCEH in connection with the
Transwestern acquisition on December 1, 2006; therefore, no
amounts are reflected in equity in earnings (losses) of
affiliates with respect to CCEH after that date.
Gain (Loss) on Non-Hedged Interest Rate
Derivatives. ETP had interest rate swaps at
December 31, 2008 and August 31, 2007, with notional
amounts of $1.43 billion and $0.93 billion,
respectively, that were not designated as hedges. Changes in the
value of these swaps were recorded directly in earnings. The
variable portion of these swaps was based on the three month
LIBOR and its corresponding forward curve. A decrease in these
rates during the comparable period resulted in decreases in the
swaps fair value and settlement amounts during the year
ended December 31, 2008 compared with the year ended
August 31, 2007. In addition, ETP recorded a gain of
$31.5 million on the settlement of a forward starting swap
during the period ended August 31, 2007.
Allowance for Equity Funds Used During
Construction. The increase between comparable
twelve month periods is due to construction within ETPs
interstate transportation segment, which is primarily related to
the Phoenix pipeline expansion project that was subsequently
completed in February 2009.
Other, Net. The increase between the
comparable twelve month periods is principally due to
$7.1 million from the excess of contributions in aid of
construction costs related to $40.0 million reimbursement
in connection with an extension on ETPs Southeast Bossier
pipeline.
Income Tax Expense. As a partnership, ETP is
generally not subject to income taxes. However, certain wholly
owned subsidiaries are corporations that are subject to income
taxes.
The decrease in income tax expense was primarily due to a
$12.0 million tax benefit associated with a trading loss
incurred by one of ETPs corporate subsidiaries in July
2008. This tax benefit was offset by higher taxes resulting from
increased earnings during the year. For additional information
related to income tax expense, see Note 9 to our
consolidated financial statements incorporated by reference into
this prospectus supplement
Segment
Operating Results
Operating income by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31, 2008
|
|
|
August 31, 2007
|
|
|
Change
|
|
|
Intrastate transportation and storage
|
|
$
|
710,070
|
|
|
$
|
479,820
|
|
|
$
|
230,250
|
|
Interstate transportation
|
|
|
124,676
|
|
|
|
95,650
|
|
|
|
29,026
|
|
Midstream
|
|
|
162,471
|
|
|
|
119,233
|
|
|
|
43,238
|
|
Retail propane
|
|
|
114,564
|
|
|
|
124,263
|
|
|
|
(9,699
|
)
|
Other
|
|
|
(2,032
|
)
|
|
|
1,735
|
|
|
|
(3,767
|
)
|
Unallocated selling, general and administrative expenses
|
|
|
(10,846
|
)
|
|
|
(11,365
|
)
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,098,903
|
|
|
$
|
809,336
|
|
|
$
|
289,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not believe the Other operating income is material for
further disclosure
and/or
discussion.
Unallocated Selling, General and Administrative
Expenses. Prior to December 2006, the selling,
general and administrative expenses that relate to the general
operations of ETP were not allocated to its segments. In
S-58
conjunction with the Transwestern acquisition in December 2006,
selling, general and administrative expenses are now allocated
monthly to ETPs subsidiaries using the Modified
Massachusetts Formula Calculation. The expenses subject to
allocation are based on estimated amounts and take into
consideration actual expenses from previous months and known
trends. The difference between the allocation and actual costs
is adjusted in the following month.
Intrastate
Transportation and Storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Natural gas MMBtu/d transported
|
|
|
11,187,327
|
|
|
|
6,124,423
|
|
|
|
5,062,904
|
|
Natural gas MMBtu/d sold
|
|
|
1,389,781
|
|
|
|
1,400,753
|
|
|
|
(10,972
|
)
|
Revenues
|
|
$
|
5,634,604
|
|
|
$
|
3,915,932
|
|
|
$
|
1,718,672
|
|
Cost of products sold
|
|
|
4,467,552
|
|
|
|
3,137,712
|
|
|
|
1,329,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,167,052
|
|
|
|
778,220
|
|
|
|
388,832
|
|
Operating expenses
|
|
|
287,515
|
|
|
|
181,133
|
|
|
|
106,382
|
|
Depreciation and amortization
|
|
|
92,979
|
|
|
|
64,423
|
|
|
|
28,556
|
|
Selling, general and administrative
|
|
|
76,488
|
|
|
|
52,844
|
|
|
|
23,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
710,070
|
|
|
$
|
479,820
|
|
|
$
|
230,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin. The increase in intrastate
transportation and storage gross margin between periods was
comprised of the following factors:
|
|
|
|
|
Overall volumes on ETPs transportation pipelines were
higher due to increased demand to transport natural gas out of
the Barnett Shale and Bossier Sands producing regions, increased
demand for natural gas used by electricity-producing power
plants connected to its assets and the completion of several
pipeline expansion projects. The increase in transport volumes
were also due to favorable market conditions between the Waha
and Katy/Houston Ship Channel market hubs resulting in higher
volumes and higher average rates on ETPs intrastate
pipeline systems. Transportation fees increased approximately
$281.3 million for the year ended December 31, 2008 as
compared to the year ended August 31, 2007. Fuel retention
revenue increased approximately $130.3 million due to
increased volumes transported through our transportation
pipelines.
|
|
|
|
Higher natural gas prices resulting in additional retention
margin of $35.8 million. ETPs average natural gas
prices for retained fuel increased to an average of $9.66/MMBtu
during the year ended December 31, 2008 from an average of
$6.69/MMBtu during the year ended August 31, 2007.
|
|
|
|
A decrease in natural gas storage-related margin of
$51.3 million. Realized margin, comprised of both margin on
the withdrawal and sale of natural gas and realized gains on
derivative instruments related to ETPs storage operations,
decreased by $79.2 million for the year ended
December 31, 2008 compared to the year ended
August 31, 2007. During the year ended December 31,
2008, there were physical sales of 39.5 Bcf of natural gas
from our Bammel storage facility compared to 67.6 Bcf in
the 2007 period. In addition, between the comparable twelve
month periods, there was an increase of $13.1 million in
storage fees, primarily due to a new contract that commenced on
April 1, 2007 at ETPs Bammel storage facility.
Furthermore, ETP recognized unrealized
mark-to-market
gains related to its storage operations (which represent the
change in the fair value of derivative instruments not
designated as hedges for accounting purposes) of
$68.2 million during the year ended December 31, 2008
compared to $5.6 million during the year ended
August 31, 2007. The amount that ETP will ultimately
realize, however, is subject to change as commodity prices
change in future months and the underlying physical transaction
occurs. In addition, ETP recognized a net
lower-of-cost-or-market
adjustment of $47.8 million related to natural gas stored
in its Bammel storage facility during the year ended
December 31, 2008.
|
S-59
Operating Expenses. Intrastate transportation
and storage operating expenses increased between periods
primarily due to increased fuel consumption of
$90.4 million, increased utility expenses of
$10.5 million, increased compressor maintenance expenses of
$7.5 million, increased pipeline maintenance expenses of
$7.5 million and increased employee costs of
$7.5 million. These increases were offset by decreases of
$11.4 million in compressor rental expense as well as a
$5.6 million decrease in measurement fees.
Selling, General and Administrative
Expenses. Intrastate transportation and storage
selling, general and administrative expenses increased between
primarily due to an increase of $15.7 million in allocated
legal fees and an increase in other allocated costs of
$8.3 million.
Depreciation and Amortization. Intrastate
transportation and storage depreciation and amortization expense
increased between periods primarily due to the continuing
expansion of our pipeline system, most notably the Southeast
Bossier and Maypearl to Malone pipelines.
Interstate
Transportation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Natural gas MMBtu/d transported
|
|
|
1,777,097
|
|
|
|
1,802,109
|
|
|
|
(25,012
|
)
|
Natural gas MMBtu/d sold
|
|
|
15,162
|
|
|
|
19,680
|
|
|
|
(4,518
|
)
|
Revenues
|
|
$
|
244,224
|
|
|
$
|
178,663
|
|
|
$
|
65,561
|
|
Operating expenses
|
|
|
56,906
|
|
|
|
36,295
|
|
|
|
20,611
|
|
Depreciation and amortization
|
|
|
37,790
|
|
|
|
27,972
|
|
|
|
9,818
|
|
Selling, general and administrative
|
|
|
24,852
|
|
|
|
18,746
|
|
|
|
6,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
124,676
|
|
|
$
|
95,650
|
|
|
$
|
29,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For all categories above, the increase between the year ended
December 31, 2008 and the year ended August 31, 2007
is primarily due to the results for the year ended
August 31, 2007 only including nine months of activity from
the date of the Transwestern acquisition (December 1,
2006). The results for the year ended December 31, 2008
include the entire twelve months.
Midstream
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Natural gas MMBtu/d sold
|
|
|
1,269,724
|
|
|
|
941,140
|
|
|
|
328,584
|
|
NGLs Bbls/d sold
|
|
|
25,939
|
|
|
|
17,907
|
|
|
|
8,032
|
|
Revenues
|
|
$
|
5,342,393
|
|
|
$
|
2,853,496
|
|
|
$
|
2,488,897
|
|
Cost of products sold
|
|
|
4,986,495
|
|
|
|
2,632,187
|
|
|
|
2,354,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
355,898
|
|
|
|
221,309
|
|
|
|
134,589
|
|
Operating expenses
|
|
|
82,872
|
|
|
|
39,148
|
|
|
|
43,724
|
|
Depreciation and amortization
|
|
|
63,287
|
|
|
|
27,331
|
|
|
|
35,956
|
|
Selling, general and administrative
|
|
|
47,268
|
|
|
|
35,597
|
|
|
|
11,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
162,471
|
|
|
$
|
119,233
|
|
|
$
|
43,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-60
Gross Margin. Midstream gross margin increased
between periods was primarily due to the following factors:
|
|
|
|
|
An increase in fee-based revenue and processing margin of
$82.9 million and $55.6 million, respectively, from
ETPs gathering and processing assets (other than its
Canyon Gathering System). The increase was due to incremental
volumes from the expansion of the Godley plant since placing it
into service as well as favorable market conditions to process
and extract NGLs.
|
|
|
|
Incremental margin of $25.1 million due to the acquisition
of the Canyon Gathering System in October 2007.
|
|
|
|
A net decrease of $24.7 million in margin from ETPs
trading and marketing activities. Net realized and unrealized
trading losses were $26.2 million for the year ended
December 31, 2008, compared to a net gain of
$2.2 million for the year ended August 31, 2007. The
loss for the year ended December 31, 2008 was due to
unfavorable market conditions. Other marketing activities
resulted in a margin of $23.3 million for the year ended
December 31, 2008 compared to $19.6 million for the
year ended August 31, 2007.
|
Operating Expenses. Midstream operating
expenses increased primarily due to increased employee-related
costs of $10.2 million, increased plant operating expenses
of $5.1 million, increased ad valorem tax of
$3.2 million, increased compressor rental expense of
$3.1 million, increased chemicals expense of
$3.1 million, increased vehicles expense of
$1.8 million, and increases in other expenses of
$5.8 million. These increases were primarily due to the
expansion of the Godley plant and the acquisition of the Canyon
Gathering System in October 2007. In addition, operating
expenses for the year ended December 31, 2008 includes an
$11.4 million goodwill impairment loss associated with the
Canyon Gathering System.
Selling, General and Administrative
Expenses. Midstream selling, general and
administrative expenses increased primarily due to increased
employee-related costs of $16.7 million, an increase of
$4.2 million in measurement and technology-related
expenses, offset by a $7.3 million decrease in allocated
legal fees and a decrease of $8.3 million in allocated
administrative overhead expenses. Other expenses increased by a
net $6.4 million.
Depreciation and Amortization. Midstream
depreciation and amortization expense increased between periods
primarily due to incremental depreciation related to the Canyon
Gathering System acquisition in October 2007 and the continued
expansion of the Godley plant.
Retail
Propane
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Retail propane gallons sold (in thousands)
|
|
|
601,134
|
|
|
|
604,269
|
|
|
|
(3,135
|
)
|
Retail propane revenues
|
|
$
|
1,514,599
|
|
|
$
|
1,179,073
|
|
|
$
|
335,526
|
|
Other retail propane related revenues
|
|
|
109,411
|
|
|
|
105,794
|
|
|
|
3,617
|
|
Retail propane cost of products sold
|
|
|
1,014,068
|
|
|
|
734,204
|
|
|
|
279,864
|
|
Other retail propane related cost of products sold
|
|
|
24,654
|
|
|
|
25,430
|
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
585,288
|
|
|
|
525,233
|
|
|
|
60,055
|
|
Operating expenses
|
|
|
350,280
|
|
|
|
297,469
|
|
|
|
52,811
|
|
Depreciation and amortization
|
|
|
79,717
|
|
|
|
70,833
|
|
|
|
8,884
|
|
Selling, general and administrative
|
|
|
40,727
|
|
|
|
32,668
|
|
|
|
8,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
114,564
|
|
|
$
|
124,263
|
|
|
$
|
(9,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-61
Volumes. The slight decrease in gallons sold
for the year ended December 31, 2008 compared to the year
ended August 31, 2007 was primarily due to the continued
conservation from customers over the past twelve months, offset
by the volumes added through acquisitions after August 31,
2007. For the year ended December 31, 2008 the weather was
5.3% colder than the year ended August 31, 2007, but volume
trends did not track as closely to weather pattern trends in
2008 due to the slow down in new home construction, the economic
recession and increased fuel prices that caused the
aforementioned customer conservation.
Revenues. Retail propane revenues increased
28.5% or $335.5 million in the year ended December 31,
2008 as compared to the year ended August 31, 2007. The
retail propane revenue variance between these periods was
principally impacted by the increase in propane selling prices
in the later period presented to keep pace with the increases in
the wholesale price of propane. The average sales price per
retail gallon sold increased approximately 29.1% for the year
ended December 31, 2008 compared to the year ended
August 31, 2007.
Cost of Products Sold. Retail propane cost of
products sold increased significantly due to the increase in the
average fuel price purchased for resale during 2008. Fuel prices
significantly declined during the last three months of the year
ended December 31, 2008, but the overall price per gallon
for the year ended December 31, 2008 was 38.8% higher than
the year ended August 31, 2007. In addition, ETP entered
into propane sales commitments with a portion of its retail
customers that provide for a contracted price agreement for a
specified period of time, typically no longer than one year.
These commitments can expose the operations to product price
risk if not offset by a propane purchase commitment. To hedge a
significant portion of these sales commitments, ETP utilizes
financial instruments (swap agreements) as purchase commitments
to lock in the margins. These financial instruments were not
designated as hedges for accounting purposes, and the change in
market value was recorded in cost of products sold in the
consolidated statements of operations. The cost of products sold
for the propane operations was negatively impacted by the
decline in propane prices from the time the agreements were
entered into. Unrealized losses of $45.6 million were
recorded through cost of products sold during the year ended
December 31, 2008, on these financial instruments. There
were minimal losses during the year ended August 31, 2007.
Gross Margin. The increase in gross margins
was principally due to ETPs ability to manage retail
selling prices despite the decrease in wholesale propane prices,
particularly in the latter part of 2008. The retail fuel gross
margins were $0.0966 per gallon higher for the year ended
December 31, 2008 as compared to the year ended
August 31, 2007 primarily due to the aforementioned, offset
by the accounting impact of the unrealized losses recorded on
financial instruments as noted above.
Operating Expenses. Operating expenses
increased between the comparable periods due to various factors.
Although volumes were relatively flat, vehicle fuel and lube
used for delivery to customers increased $10.7 million
primarily due to the increase in the average fuel costs between
the comparable periods. Wages, deferred compensation and other
employee benefits increased $24.5 million due to an
increase in headcount as a result of acquisitions and cost of
living increases were given to existing employees. The
employee-related increases were offset by savings from delays in
hiring seasonal employees due to volume pressures described
above. Bad debt expense has increased a net $4.2 million as
the general economy has also shown pressure on the collection of
receivables leading to a decision to increase accounts
receivable reserves. ETPs operational employee incentive
program was $7.2 million higher for the year ended
December 31, 2008 as compared to August 31, 2007, due
to more favorable results achieved during the year ended
December 31, 2008 than during the year ended
August 31, 2007.
Selling, General and Administrative
Expenses. The increase in selling, general and
administrative expenses between the comparable periods was
primarily due to increased administrative expense allocations of
$2.4 million, increases in wages, deferred compensation and
other employee related benefits of $2.7 million, and
consulting and other costs related to information technology
systems implementations and non-recurring costs related to
property settlements in 2008.
Depreciation and Amortization Expense. The
increase in depreciation and amortization expense between the
comparable periods was primarily due to the incremental expense
resulting from acquisitions made subsequent to August 31,
2007.
S-62
Four Months Ended December 31, 2007 compared to the Four
Months Ended December 31, 2006 (unaudited tabular dollar
amounts in thousands)
In November 2007, we changed our fiscal year end from August 31
to December 31 and, in connection with such change, we are
including comparative financial results for the four-month
transition period of September 1, 2007 to December 31,
2007.
ETE
Stand-alone Results
The following table summarizes the key components of our
stand-alone results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Equity in earnings of affiliates
|
|
$
|
168,547
|
|
|
$
|
107,586
|
|
|
$
|
60,961
|
|
Selling, general and administrative expenses
|
|
|
2,875
|
|
|
|
3,131
|
|
|
|
(256
|
)
|
Interest expense
|
|
|
37,071
|
|
|
|
28,026
|
|
|
|
9,045
|
|
Losses on non-hedged interest rate derivatives
|
|
|
(27,670
|
)
|
|
|
|
|
|
|
(27,670
|
)
|
Other, net
|
|
|
(8,128
|
)
|
|
|
252
|
|
|
|
(8,380
|
)
|
Equity in Earnings of Affiliates. The increase
in equity in earnings of affiliates was directly related to the
changes in the ETP segment income described below.
Interest Expense. Our interest expense
increased because we entered into our term loan facility on
November 1, 2006. Such borrowings were outstanding for the
entire four months ended December 31, 2007.
Losses on Non-Hedged Interest Rate Derivatives. See
discussion below in Other, net.
Other, Net. The change in other, net was due
primarily to losses of $27.7 million on changes in value of
interest rate swaps that are not accounted for as hedges. Such
gains and losses were included in interest expense during the
four months ended December 31, 2006. The four months ended
December 31, 2007 also included an expense of
$7.8 million for liquidated damages under the registration
rights agreements for the March 2007 and November 2006 private
placements of ETE common units.
Consolidated
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Revenues
|
|
$
|
2,349,342
|
|
|
$
|
2,162,466
|
|
|
$
|
186,876
|
|
Cost of products sold
|
|
|
1,673,654
|
|
|
|
1,689,843
|
|
|
|
(16,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
675,688
|
|
|
|
472,623
|
|
|
|
203,065
|
|
Operating expenses
|
|
|
221,757
|
|
|
|
173,365
|
|
|
|
48,392
|
|
Depreciation and amortization
|
|
|
75,406
|
|
|
|
52,840
|
|
|
|
22,566
|
|
Selling, general and administrative
|
|
|
61,874
|
|
|
|
43,602
|
|
|
|
18,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
316,651
|
|
|
|
202,816
|
|
|
|
113,835
|
|
Interest expense, net of interest capitalized
|
|
|
(103,375
|
)
|
|
|
(82,979
|
)
|
|
|
(20,396
|
)
|
Equity in earnings (losses) of affiliates
|
|
|
(94
|
)
|
|
|
4,743
|
|
|
|
(4,837
|
)
|
Gain (loss) on disposal of assets
|
|
|
14,310
|
|
|
|
2,212
|
|
|
|
12,098
|
|
Other, net
|
|
|
(34,734
|
)
|
|
|
2,248
|
|
|
|
(36,982
|
)
|
Income tax expense
|
|
|
(9,949
|
)
|
|
|
(2,155
|
)
|
|
|
(7,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
182,809
|
|
|
$
|
126,885
|
|
|
$
|
55,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-63
See the detailed discussion of revenues, cost of products sold,
margin and operating expense by operating segment below.
Interest Expense. Interest expense increased
$20.4 million principally due to a net $9.0 million
increase in interest expense related to our borrowings, a net
$13.8 million increase in interest expense related to
increased borrowings on ETPs Senior Notes and the ETP
Credit Facility and $0.5 million of interest on borrowings
related to the Transwestern acquisition. ETP borrowings
increased primarily due to the financing of growth capital
expenditures and the Canyon acquisition. The increased interest
expense was offset by $2.0 million of unrealized losses
related to non-hedged interest rate swaps included in interest
expense for the four months ended December 31, 2006.
Unrealized gains and losses related to non-hedged interest rate
swaps were included in other income (expense), net for the four
months ended December 31, 2007. The increase in interest
expense was also offset by propane related interest which
decreased $2.0 million due primarily to the scheduled debt
payments that have occurred between the four-month periods.
Equity in Earnings of Affiliates. The decrease
in equity in earnings (losses) of affiliates was due primarily
to $5.1 million of equity income from our 50% ownership of
the member interests in CCEH for the month of November 2006. ETP
redeemed its investment in CCEH in connection with its
Transwestern acquisition on December 1, 2006. ETP does not
include earnings from equity method unconsolidated affiliates in
its measurement of operating income because such earnings have
not been significant historically.
Gain on Sale of Assets. On October 1,
2007 ETP sold its 60% interest in a Canadian wholesale fuel
business for a gain of $10.2 million.
Income Tax Expense. As a partnership, ETP is
generally not subject to income taxes. However, certain wholly
owned subsidiaries are corporations that are subject to income
taxes.
The increase in income tax expense was primarily related to
$3.9 million recorded for the four months ended
December 31, 2007 of Texas margin tax that was not
effective until January 1, 2007 and $3.9 million of
taxes on the gain on the sale of ETPs interest in a
Canadian wholesale fuel business.
Other, Net. The change in other, net, was due
to the factors discussed above for our stand-alone results.
Segment
Operating Results
Operating income by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Intrastate transportation and storage
|
|
$
|
169,361
|
|
|
$
|
109,262
|
|
|
$
|
60,099
|
|
Interstate transportation
|
|
|
29,657
|
|
|
|
11,854
|
|
|
|
17,803
|
|
Midstream
|
|
|
71,853
|
|
|
|
40,421
|
|
|
|
31,432
|
|
Retail propane
|
|
|
46,747
|
|
|
|
49,841
|
|
|
|
(3,094
|
)
|
Other
|
|
|
(796
|
)
|
|
|
528
|
|
|
|
(1,324
|
)
|
Unallocated selling, general and administrative expenses
|
|
|
(171
|
)
|
|
|
(9,090
|
)
|
|
|
8,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
316,651
|
|
|
$
|
202,816
|
|
|
$
|
113,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Selling, General and Administrative
Expenses. Prior to December 2006, the selling,
general and administrative expenses that relate to the general
operations of ETP were not allocated to its segments. In
conjunction with the Transwestern acquisition, selling, general
and administrative expenses are now allocated monthly to
ETPs subsidiaries using the Modified Massachusetts Formula
Calculation. The expenses subject to allocation are based on
estimated amounts and take into consideration actual expenses
from previous months and known trends. The difference between
the estimated allocation and actual costs is adjusted in the
following month. For the four months ended December 31,
2007, a net $12.1 million allocation to ETPs
subsidiaries exceeded total incurred costs.
S-64
Intrastate
Transportation and Storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Natural gas MMBtu/d transported
|
|
|
8,787,387
|
|
|
|
4,889,029
|
|
|
|
3,898,358
|
|
Natural gas MMBtu/d sold
|
|
|
1,259,566
|
|
|
|
1,379,721
|
|
|
|
(120,155
|
)
|
Revenues
|
|
$
|
1,254,401
|
|
|
$
|
1,195,871
|
|
|
$
|
58,530
|
|
Cost of products sold
|
|
|
964,568
|
|
|
|
994,511
|
|
|
|
(29,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
289,833
|
|
|
|
201,360
|
|
|
|
88,473
|
|
Operating expenses
|
|
|
76,428
|
|
|
|
56,452
|
|
|
|
19,976
|
|
Depreciation and amortization
|
|
|
23,429
|
|
|
|
19,020
|
|
|
|
4,409
|
|
Selling, general and administrative
|
|
|
20,615
|
|
|
|
16,626
|
|
|
|
3,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
169,361
|
|
|
$
|
109,262
|
|
|
$
|
60,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes and Gross Margin. Increases in
intrastate transportation and storage volumes and gross margin
are comprised of the following factors:
|
|
|
|
|
Transported natural gas volumes increased principally due to the
increased volumes experienced on the ET Fuel and East Texas
Pipeline systems as a result of the completion of the Cleburne
to Carthage Pipeline, increased demand to transport natural gas
out of the Barnett Shale and Bossier Sands producing regions,
and the continued effort to secure long-term shipper contracts.
|
|
|
|
Natural gas sales volumes on the HPL System decreased primarily
due to the new CenterPoint contract that commenced on
April 1, 2007. Under the previous contract, ETP sold and
delivered natural gas to CenterPoint for a bundled price. Under
the terms of the new agreement, CenterPoint has contracted for
129 Bcf per year of firm transportation capacity combined
with 10 Bcf of working gas capacity in ETPs Bammel
storage facility.
|
|
|
|
Transportation fees increased approximately $53.2 million.
Retention revenue increased approximately $29.7 million due
to increased volumes transported through ETPs
transportation pipelines;
|
|
|
|
Increase in processing margin of $8.6 million from
ETPs HPL system. Processing margins generated from
ETPs HPL system benefited from favorable market conditions
to process and extract NGLs during the four months ended
December 31, 2007; and
|
|
|
|
Net decrease in storage margins of $9.4 million. During the
four months ended December 31, 2006, ETP recognized
approximately $27.0 million of margin on 13 Bcf of gas
sold from its Bammel storage facility. Due to market conditions,
there were no withdrawals in the same period in 2007; however,
ETP did recognize $9.2 million in gains from the
discontinuation of hedge accounting resulting from its
determination that originally forecasted sales of natural gas
from its Bammel storage facility were no longer probable to
occur by the specified time period, or within an additional
two-month time period thereafter. In addition, fee-based storage
revenues increased $8.4 million primarily due to the new
Centerpoint contract which commenced on April 1, 2007 in
which Centerpoint contracted for 10 Bcf of working gas
capacity in ETPs Bammel storage facility.
|
Operating Expenses. Intrastate transportation
and storage operating expenses increased $20.0 million
primarily due to an increase of $11.4 million in fuel
consumption, an increase of $4.5 million in electricity
costs, an increase of $6.1 million in compressor and
pipeline maintenance, and an increase of $2.0 million in
employee related costs such as salaries, incentive compensation
and healthcare costs. These increases were offset by a
$2.8 million decrease in compressor rentals and a
$2.9 million decrease in professional fees related to the
EMS contract buyout in September 2007.
Selling, General and Administrative
Expenses. Intrastate transportation and storage
selling, general and administrative expenses increased
$4.0 million principally due to an increase in general and
administrative expenses allocated from the midstream segment as
noted above.
S-65
Depreciation and Amortization. Intrastate
transportation and storage depreciation and amortization expense
increased $4.4 million principally due to additions to
property and equipment most notably the Cleburne to Carthage
Pipeline.
Interstate
Transportation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Natural gas MMBtu/d transported
|
|
|
1,708,477
|
|
|
|
1,822,065
|
|
|
|
(113,588
|
)
|
Natural gas MMBtu/d sold
|
|
|
13,663
|
|
|
|
14,104
|
|
|
|
(441
|
)
|
Revenues
|
|
$
|
76,000
|
|
|
$
|
19,003
|
|
|
$
|
56,997
|
|
Operating expenses
|
|
|
23,922
|
|
|
|
1,396
|
|
|
|
22,526
|
|
Depreciation and amortization
|
|
|
12,305
|
|
|
|
3,191
|
|
|
|
9,114
|
|
Selling, general and administrative
|
|
|
10,116
|
|
|
|
2,562
|
|
|
|
7,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
29,657
|
|
|
$
|
11,854
|
|
|
$
|
17,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in all categories was attributable to the
Transwestern acquisition on December 1, 2006.
Midstream
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Natural gas MMBtu/d sold
|
|
|
1,090,090
|
|
|
|
968,016
|
|
|
|
122,074
|
|
NGLs Bbls/d sold
|
|
|
25,389
|
|
|
|
12,458
|
|
|
|
12,931
|
|
Revenues
|
|
$
|
1,166,313
|
|
|
$
|
905,392
|
|
|
$
|
260,921
|
|
Cost of products sold
|
|
|
1,043,191
|
|
|
|
839,561
|
|
|
|
203,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
123,122
|
|
|
|
65,831
|
|
|
|
57,291
|
|
Operating expenses
|
|
|
17,633
|
|
|
|
11,710
|
|
|
|
5,923
|
|
Depreciation and amortization
|
|
|
14,943
|
|
|
|
7,748
|
|
|
|
7,195
|
|
Selling, general and administrative
|
|
|
18,693
|
|
|
|
5,952
|
|
|
|
12,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
71,853
|
|
|
$
|
40,421
|
|
|
$
|
31,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin. Midstreams gross margin
increased between comparable periods primarily due to the
following factors:
|
|
|
|
|
Increases in processing margin of $37.6 million and
fee-based revenue of $17.9 million from ETPs
gathering and processing assets. The increase was due to
incremental volumes from the completion of ETPs Godley
plant in October 2006, the continued expansion of the plant
since placing it into service, and the acquisition of three
gathering systems during the first six months of the 2007 fiscal
year. In addition, ETPs midstream assets benefited from
favorable market conditions to process and extract NGLs during
the four months ended December 31, 2007. Due to changes in
the contract structures at ETPs Godley plant, arrangements
for which ETP had been recognizing the increased margin from
favorable conditions converted to long-term fee-based contracts
in November 2007. As such, ETP expects margin from processing at
its Godley plant to be more predictable and less sensitive to
commodity price volatility. As of December 31, 2007, the
Godley plant had approximately
500 MMcf/d
of cryoprocessing capacity and
100 MMcf/d
of dew point processing capacity.
|
|
|
|
Increase in non-trading margin from ETPs marketing
activities of $1.0 million as market conditions resulted in
higher sales volumes conducted by ETPs producer
services operations.
|
|
|
|
Decrease in net trading revenues of $5.2 million.
|
S-66
|
|
|
|
|
Canyon Gathering System The acquisition of the
Canyon Gathering System on October 5, 2007 contributed
approximately $5.6 million of incremental margin for the
four months ended December 31, 2007.
|
Operating Expenses. Midstream operating
expenses increased $5.9 million, primarily driven by
increased employee-related costs such as salaries, incentive
compensation and healthcare costs of $2.2 million,
increased compressor rentals of $1.5 million, and increased
pipeline and compressor maintenance expense of
$0.7 million. The increases were principally due to the
gathering system acquisitions in fiscal 2007, the start up and
continued expansion of the Godley plant, and the Canyon
acquisition.
Selling, General and Administrative
Expenses. Midstream selling, general and
administrative expenses increased $12.7 million which was
attributable to $9.2 million in increased legal fees
principally related to regulatory matters, a $4.2 million
allocation of parent company administrative expenses for
overhead costs that previously had not been allocated in 2006,
and a $1.9 million increase in employee-related costs such
as salaries, incentive compensation and healthcare costs. These
factors were offset by a $5.8 million increase of general
and administrative expenses allocated to the transportation
segment. The allocation of general and administrative expenses
between the midstream and the intrastate transportation and
storage segments is based on the Modified Massachusetts Formula
Calculation and is intended to fairly present the segments
operating results.
Depreciation and Amortization. Midstream
depreciation and amortization expense increased
$7.2 million principally due to additions to property and
equipment including the completion and continued expansion of
ETPs Godley plant, and the acquisition of certain
gathering systems in 2006.
Retail
Propane
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Retail propane gallons sold (in thousands)
|
|
|
205,311
|
|
|
|
214,623
|
|
|
|
(9,312
|
)
|
Retail propane revenues
|
|
$
|
471,494
|
|
|
$
|
409,821
|
|
|
$
|
61,673
|
|
Other retail propane related revenues
|
|
|
39,764
|
|
|
|
40,020
|
|
|
|
(256
|
)
|
Retail propane cost of products sold
|
|
|
315,698
|
|
|
|
256,994
|
|
|
|
58,704
|
|
Other retail propane related cost of products sold
|
|
|
9,460
|
|
|
|
10,344
|
|
|
|
(884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
186,100
|
|
|
|
182,503
|
|
|
|
3,597
|
|
Operating expenses
|
|
|
102,537
|
|
|
|
101,508
|
|
|
|
1,029
|
|
Depreciation and amortization
|
|
|
24,537
|
|
|
|
22,520
|
|
|
|
2,017
|
|
Selling, general and administrative
|
|
|
12,279
|
|
|
|
8,634
|
|
|
|
3,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
46,747
|
|
|
$
|
49,841
|
|
|
$
|
(3,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes. Total gallons sold by ETPs
retail propane operations decreased due to a combination of
below normal degree days, customer conservation, and the slow
down of new home construction in our propane markets. The
overall weather in ETPs areas of operations during the
four months ended December 31, 2007 was 2.9% warmer than
the four months ended December 31, 2006 and 9.8% warmer
than normal.
Revenues. Retail propane revenues increased
$61.7 million mainly due to increased sale prices driven by
the increased cost of fuel. This increase was offset by 9.8%
warmer than normal weather and 2.9% warmer weather than the same
period last year.
Cost of Products Sold. Retail propane cost of
products sold increased by $58.7 million mainly related to
the increase in overall cost of fuel to the company offset by
the decrease in gallons sold. On an average, fuel costs were
approximately $0.35/gallon higher.
Gross Margin. Overall gross margins increased
$3.6 million even though gallon sales decreased. The
propane margin remained strong despite warmer weather conditions
and higher fuel prices. Optimization of the margins is
influenced by market opportunities, independent competitors and
concerns for long term retention of customers.
S-67
Operating Expenses. Operating expenses
increased by $1.0 million. Included in these operating
expenses were increases related to higher vehicle fuel costs and
other vehicle expenses, offset by the cost conservation efforts
of the retail operations and the delay in hiring seasonal staff
due to the warmer weather.
Selling, General and Administrative
Expenses. The increase in selling, general and
administrative expenses was primarily due to increased
administrative expense allocations. Effective with the
Transwestern acquisition in December 2006, an allocation of
general and administrative expenses based on the Modified
Massachusetts Formula Calculation is now made to ETPs
subsidiaries, which increased the retail propane selling,
general and administrative expenses by a net $5.1 million
for the four months ended December 31, 2007. This increase
from the allocation of expenses was offset by the reduction of
certain personnel costs at the propane operating partnerships.
Depreciation and Amortization Expense. The
increase in depreciation and amortization expense was primarily
due to the depreciation and amortization of assets and
amortizable intangibles added through acquisitions made after
December 31, 2006.
Liquidity
and Capital Resources
Energy
Transfer Equity
We currently have no separate operating activities apart from
those conducted by ETP. The principal sources of our cash flow
are our direct and indirect investments in the limited and
general partner interests of ETP. The amount of cash that ETP
can distribute to its partners, including us, each quarter is
based on earnings from ETPs business activities and the
amount of available cash, as discussed below. We also have a
$500.0 million revolving credit facility that expires in
February 2011 with available capacity of $376.1 million as
of September 30, 2009, which will be replaced by a new
$200 million revolving credit facility that we will enter
into contemporaneously with this offering, and we currently have
no capital requirements.
Our primary cash requirements are for general and administrative
expenses, debt service requirements and distributions to our
general and limited partners. We currently expect to fund our
short-term needs for such items with our distributions from ETP
and through borrowings under our new $200 million revolving
credit facility that we will enter into contemporaneously with
the consummation of this offering.
Energy
Transfer Partners
ETPs ability to satisfy its obligations and pay
distributions to its unitholders will depend on its future
performance, which will be subject to prevailing economic,
financial, business and weather conditions, and other factors,
many of which are beyond managements control.
ETP currently believes that its business has the following
future capital requirements:
|
|
|
|
|
growth capital expenditures for its midstream and intrastate
transportation and storage segments primarily for the
construction of new pipelines and compression, for which ETP
expects to spend between $60 million and $80 million
in 2010;
|
|
|
|
growth capital expenditures for its interstate transportation
segment, excluding capital contributions to the MEP and FEP
projects as discussed below, for the construction of new
pipelines and pipeline expansions for its interstate operations,
for which ETP expects to spend between $880 million and
$900 million in 2010;
|
|
|
|
capital contributions to MEP and FEP as follows:
|
|
|
|
|
|
With respect to MEP, capital expenditures have been funded under
the MEP Facility and through capital contributions from ETP and
KMP, our joint venture partner. In September 2009, MEP issued
$800 million of senior unsecured notes and used the
proceeds to reduce amounts outstanding under the MEP Facility.
ETP made a contribution of $200 million to MEP during
October 2009 and does not expect any additional capital
contributions during the remainder of 2009. The October 2009
contribution was used to further reduce amounts outstanding
under the MEP Facility. Subsequent to these repayments, the
commitment amount under the MEP Facility was reduced from
$1.4 billion to
|
S-68
|
|
|
|
|
$275 million. Availability on the MEP Facility will be used
to fund capital expenditures associated with MEPs
expansion projects that are expected to be completed by December
2010. For 2010, ETP expects its capital contributions to MEP to
be between $80 million and $90 million.
|
|
|
|
|
|
With respect to FEP, in November 2009, it entered into a senior
unsecured revolving credit facility, which is severally
guaranteed by ETP and KMP. ETP does not expect to make
additional capital contributions to FEP and has been reimbursed
for its prior capital contributions, which totaled
$70.0 million through September 30, 2009.
|
|
|
|
|
|
growth capital expenditures for its retail propane segment of
between $30 million and $40 million in 2010;
|
|
|
|
maintenance capital expenditures of between $120 million
and $130 million in 2010; and
|
|
|
|
acquisitions, including the potential acquisition of new
pipeline systems and propane operations.
|
ETP generally funds its capital requirements with cash flows
from operating activities and, to the extent that they exceed
cash flows from operating activities, with proceeds of
borrowings under existing credit facilities, long-term debt, the
issuance of additional common units or a combination thereof.
In light of the current conditions in the capital markets, and
based on ETPs projected growth capital expenditures and
capital contributions to joint venture entities, ETP has taken
significant steps to preserve its liquidity position including,
but not limited to, reducing discretionary capital expenditures
and continuing to manage operating and administrative costs.
During the nine months ended September 30, 2009, ETP
received approximately $578.3 million in net proceeds from
its January and April common unit offerings and
$993.6 million in net proceeds from an offering of
$1.0 billion of aggregate principal amount of ETP senior
notes in April. As of September 30, 2009, in addition to
approximately $50.1 million of cash on hand, ETP had
available capacity under the ETP Credit Facility of
approximately $1.45 billion. In addition, ETP received
approximately $275.3 million in net proceeds from its
October common unit offering and approximately
$422.9 million in net proceeds from its January 2010 common
unit offering. Based on current estimates, ETP expects to
utilize these resources, along with cash from operations, to
fund ETPs announced growth capital expenditures and
working capital needs without ETP having the need to access the
capital markets again until the latter half of 2010; however,
ETP may issue debt or equity securities prior to that time as it
deems prudent to provide liquidity for its new capital projects
or other partnership purposes.
The assets used in ETPs natural gas operations, including
pipelines, gathering systems and related facilities, are
generally long-lived assets and do not require significant
maintenance capital expenditures. The assets utilized in
ETPs propane operations do not typically require lengthy
manufacturing process time or complicated, high technology
components. Accordingly, ETP does not have any significant
financial commitments for maintenance capital expenditures in
its businesses. From time to time ETP experiences increases in
pipe costs due to a number of reasons, including but not limited
to, replacing pipe caused by delays from mills, limited
selection of mills capable of producing large diameter pipe
timely, higher steel prices and other factors beyond our
control. However, ETP includes these factors into its
anticipated growth capital expenditures for each year.
Cash Flows for the Nine Months Ended September 30, 2009
Compared to the Nine Months Ended September 30, 2008
ETPs internally generated cash flows may change in the
future due to a number of factors, some of which it cannot
control. These factors include regulatory changes, the price for
its products and services, the demand for such products and
services, margin requirements resulting from significant changes
in commodity prices, operational risks, the successful
integration of its acquisitions and other factors.
Operating Activities. Cash provided by
operating activities during the nine months ended
September 30, 2009 was $721.4 million as compared to
$908.8 million for the same period in 2008. Net income was
$455.8 million and $619.1 million for the 2009 and
2008 periods, respectively. The difference between net income
and the net cash provided by operating activities consisted of
changes in operating assets and liabilities of
$10.2 million and $110.4 million and non-cash activity
of $255.4 million and $179.4 million for the 2009 and
2008 periods, respectively.
S-69
The non-cash activity in the 2009 and 2008 periods consisted
primarily of depreciation and amortization of
$239.6 million and $200.9 million, amortization of
finance costs charged to interest of $11.6 million and
$6.5 million and non-cash compensation expense of
$22.3 million and $15.3 million for 2009 and 2008,
respectively. These amounts are partially offset by the
allowance for equity funds used during construction was
$18.6 million and $45.3 million for the 2009 and 2008
periods, respectively.
Various factors affect the changes in operating assets and
liabilities such as the timing of accounts receivable
collections, payments on accounts payable, the timing of the
purchase and sale of propane and natural gas inventories, and
the timing of advances and deposits received from customers.
Investing Activities. Cash used in investing
activities during the nine months ended September 30, 2009
was $1.23 billion as compared to $1.44 billion for the
same period in 2008. Total capital expenditures (excluding the
allowance for equity funds used during construction) for the
2009 period were $703.5 million, including changes in
accruals of $98.3 million. This compares to total capital
expenditures (excluding the allowance for equity funds used
during construction) for the 2008 period of $1.51 billion,
including changes in accruals of $119.2 million. In
addition, during the 2009 period ETP made advances to its joint
ventures of $534.5 million. In the 2008 period, ETP paid
$62.0 million in cash for acquisitions. These amounts were
offset by a $63.5 million net reimbursement during the
first quarter of 2008 from MEP to ETP for previous advances to
MEP.
Growth capital expenditures for the 2009 period, before changes
in accruals, were $394.5 million for ETPs midstream
and intrastate transportation and storage segments,
$107.7 million for its interstate transportation segment,
and $31.3 million for its retail propane segment and all
other. ETP also incurred $71.8 million of maintenance
capital expenditures, of which $45.4 million related to its
midstream and intrastate transportation and storage segments,
$8.9 million related to its interstate segment and
$17.4 million related to its retail propane segment.
Growth capital expenditures for the 2008 period, before changes
in accruals, were $935.5 million for ETPs midstream
and intrastate transportation and storage segments,
$581.0 million for its interstate transportation segment,
and $34.5 million for its retail propane segment and all
other. ETP also incurred $75.9 million in maintenance
expenditures, of which $43.0 million related to its
midstream and intrastate transportation and storage segments,
$13.5 million related to its interstate transportation
segment and $19.4 million related to its retail propane
segment.
Financing Activities. Cash provided by
financing activities during the nine months ended
September 30, 2009 period was $462.5 million as
compared to $1.10 billion for the same period in 2008. In
the 2009 period, ETP received $578.9 million in net
proceeds from common unit offerings as compared to
$373.1 million in 2008. Net proceeds from ETPs
offerings were used to repay outstanding borrowings under the
ETP Credit Facility, to fund capital expenditures and to fund
capital contributions to joint ventures related to pipeline
construction projects. During the 2009 period, we had a net
increase in our debt level of $520.6 million as compared to
a net increase in our debt level of $1.32 billion for 2008.
In addition, we paid distributions of $351.0 million to our
partners in 2009 as compared to $328.6 million in 2008 and
paid distributions to noncontrolling interests of
$278.3 million in 2009 as compared to $240.0 million
in 2008.
In the 2009 period, the net increase in debt was primarily due
to ETPs borrowings to fund capital expenditures and to
fund its capital contributions to joint ventures, partially
offset by the use of proceeds from its common unit offerings.
ETP also issued senior notes for net proceeds of
$993.6 million, which were used to repay outstanding
borrowings under the ETP Credit Facility and for general
partnership purposes.
In the 2008 period, ETP received $1.48 billion in net
proceeds from the issuance of senior notes, which were used to
repay principal and interest on its credit facilities, to fund
its growth capital expenditures and for general partnership
purposes.
Cash
Flows for the Year Ended December 31, 2008 Compared to the
Year Ended August 31, 2007
Operating Activities. Cash provided by
operating activities during the year ended December 31,
2008, was $1.14 billion as compared to cash provided by
operating activities of $1.01 billion for the year ended
August 31, 2007. The difference between net income and the
net cash provided by operations for the year
S-70
ended December 31, 2008 consisted of non-cash charges of
$307.5 million (principally depreciation and amortization)
and changes in operating assets and liabilities of
$156.4 million. Various components of operating assets and
liabilities changed significantly from the prior period
including factors such as the timing of accounts receivable
collections, payments on accounts payable, the timing of the
purchase and sale of propane and natural gas inventories, and
the timing of advances and deposits received from customers.
Investing Activities. Cash used in investing
activities during the year ended December 31, 2008 of
$2.02 billion was comprised primarily of cash paid for
acquisitions of $84.8 million and $1.92 billion
invested for growth capital expenditures (net of contribution in
aid of construction costs as discussed in Note 2 to our
consolidated financial statements), including changes in
accruals of $57.9 million. Total growth capital
expenditures consist of $1.19 billion for ETPs
intrastate operations, $695.1 million for its interstate
operations, and $40.2 million for its propane operations.
ETP also incurred $141.0 million in maintenance
expenditures needed to sustain operations of which
$75.4 million related to intrastate operations,
$25.1 million related to interstate operations, and
$40.5 million to propane operations. In addition, ETP
received a reimbursement of $63.5 million, net during the
first quarter of 2008 from MEP for previous advances. There were
also advances of $9.0 million made to FEP during the year
ended December 31, 2008.
Financing Activities. Cash provided by
financing activities was $907.3 million for the year ended
December 31, 2008. ETP received $373.1 million in net
proceeds from its common unit offerings. Proceeds from the
equity offerings were used to repay borrowings from the ETP
Credit Facility. ETP also received net proceeds of approximately
$2.08 billion from its issuance of senior notes which were
used to repay other indebtedness. During the year ended
December 31, 2008, we had a net increase in our debt level
of $1.32 billion primarily to fund ETPs growth
capital expenditures and for general partnership purposes.
During the year ended December 31, 2008, we paid
distributions of $435.9 million to our partners related to
the four-month transition period ended December 31, 2007
and the quarters ended March 31, 2008, June 30, 2008,
and September 30, 2008.
Financing
and Sources of Liquidity
During 2009 and thus far in 2010, ETP closed on the following
public offerings of common units, which were registered under
the Securities Act pursuant to a Registration Statement on
Form S-3ASR.
The net proceeds were used by ETP to repay outstanding
borrowings under the ETP Credit Facility, to fund capital
expenditures, to fund capital contributions to joint venture
entities related to pipeline construction projects, and for
general partnership purposes:
|
|
|
|
|
6,900,000 common units in January 2009 at $34.05 per unit,
resulting in net proceeds of approximately $225.9 million;
|
|
|
|
9,775,000 common units in April 2009 at $37.55 per unit,
resulting in net proceeds of approximately $352.4 million;
|
|
|
|
6,900,000 common units in October 2009 at $41.27 per unit,
resulting in net proceeds of approximately
$275.3 million; and
|
|
|
|
9,775,000 common units in January 2010 at $44.72 per unit,
resulting in net proceeds of approximately $422.9 million.
|
In April 2009, ETP completed the issuance of $350.0 million
aggregate principal amount of 8.50% ETP senior notes due 2014
and $650.0 million aggregate principal amount of 9.00% ETP
senior notes due 2019. The proceeds of approximately
$993.6 million were used to repay borrowings under the ETP
Credit Facility and for general partnership purposes.
On August 26, 2009, ETP entered into an Equity Distribution
Agreement with UBS. Pursuant to this agreement, ETP may offer
and sell from time to time through UBS, as their sales agent,
its common units having an aggregate offering price of up to
$300.0 million. Sales of the units will be made by means of
ordinary brokers transactions on the NYSE at market
prices, in block transactions or as otherwise agreed between ETP
and UBS. Under the terms of this agreement, ETP may also sell
its common units to UBS as principal for its own account at a
price agreed upon at the time of sale. Any sale of ETP common
units to
S-71
UBS as principal would be pursuant to the terms of a separate
agreement between ETP and UBS. As of December 31, 2009, ETP
had sold 2,079,593 common units pursuant to this agreement for
net proceeds of approximately $89.7 million.
ETP filed a Registration Statement on
Form S-3
with the SEC that was declared effective under the Securities
Act on August 14, 2009, and registered common units and
debt securities with an aggregate offering price of
$1.0 billion that may be offered for sale by ETP from time
to time. Pursuant to that same Registration Statement, ETP also
filed a prospectus with the SEC to register 12,000,000 ETP
common units that are currently held by us and may be sold by us
from time to time.
In addition, ETP filed a Registration Statement on
Form S-4
with the SEC that was declared effective under the Securities
Act on October 2, 2009, to register 7,500,000 ETP common
units that may be issued from time to time in connection with
one or more acquisitions. On November 6, 2009, ETP issued
1,450,076 common units in exchange for the contribution to ETP
of all of the outstanding equity interests of SEC General
Holdings, LLC, a Texas limited liability company, SEC Energy
Products & Services, L.P., a Texas limited
partnership, SEC Energy Realty GP, LLC, a Texas limited
liability company, and SEC-EP Realty, Ltd., a Texas limited
partnership. The acquired companies operate a natural gas
compression equipment business in Arkansas, California,
Colorado, Louisiana, New Mexico, Oklahoma, Pennsylvania and
Texas.
As of December 31, 2008 and September 30, 2009, our
outstanding indebtedness was as follows (in thousands):
|
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|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ETE Indebtedness
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan Facility
|
|
$
|
1,450,000
|
|
|
$
|
1,450,000
|
|
Senior Secured Revolving Credit Facility
|
|
|
123,923
|
|
|
|
121,642
|
|
ETP Indebtedness
|
|
|
|
|
|
|
|
|
ETP Senior Notes
|
|
|
5,050,000
|
|
|
|
4,050,000
|
|
Transwestern Senior Notes
|
|
|
520,000
|
|
|
|
520,000
|
|
HOLP Senior Secured Notes
|
|
|
144,912
|
|
|
|
181,410
|
|
Revolving Credit Facilities
|
|
|
483,265
|
|
|
|
912,000
|
|
Other long-term debt
|
|
|
27,159
|
|
|
|
14,014
|
|
Unamortized discounts
|
|
|
(13,009
|
)
|
|
|
(13,477
|
)
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
7,786,250
|
|
|
$
|
7,235,589
|
|
|
|
|
|
|
|
|
|
|
For a description of our current indebtedness, including the
indebtedness of ETP, please see Description of Other
Indebtedness.
Contractual
Obligations
The following table summarizes our long-term debt and other
contractual obligations as of December 31, 2008 (in
thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Long-term debt(a)
|
|
$
|
7,235,589
|
|
|
$
|
45,232
|
|
|
$
|
206,862
|
|
|
$
|
3,147,308
|
|
|
$
|
3,836,187
|
|
Interest on fixed rate long-term debt(b)
|
|
|
4,097,248
|
|
|
|
307,958
|
|
|
|
637,148
|
|
|
|
604,179
|
|
|
|
2,547,963
|
|
Payments on derivatives
|
|
|
264,142
|
|
|
|
142,432
|
|
|
|
88,558
|
|
|
|
23,684
|
|
|
|
9,468
|
|
Purchase commitments(c)
|
|
|
259,483
|
|
|
|
256,901
|
|
|
|
2,582
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
314,648
|
|
|
|
21,041
|
|
|
|
38,498
|
|
|
|
30,999
|
|
|
|
224,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
12,171,110
|
|
|
$
|
773,564
|
|
|
$
|
973,648
|
|
|
$
|
3,806,170
|
|
|
$
|
6,617,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Description of Other Indebtedness. |
S-72
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|
|
(b) |
|
Fixed rate interest on long-term debt includes the amount of
interest due on our fixed rate long-term debt. These amounts do
not include interest on variable rate debt obligations, which
include our and ETPs revolving credit facilities and
revolving credit facility swingline loan options. As of
December 31, 2008, variable rate interest on our and
ETPs outstanding balance of variable rate debt of
$2.48 billion would be $90.3 million on an annual
basis. |
|
(c) |
|
We define a purchase commitment as an agreement to purchase
goods or services that is enforceable and legally binding
(unconditional) on us that specifies all significant terms,
including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing
of the transactions. We have long and short-term product
purchase obligations for propane and energy commodities with
third-party suppliers. These purchase obligations are entered
into at either variable or fixed prices. The purchase prices
that we are obligated to pay under variable price contracts
approximate market prices at the time we take delivery of the
volumes. Our estimated future variable price contract payment
obligations are based on the December 31, 2008 market price
of the applicable commodity applied to future volume
commitments. Actual future payment obligations may vary
depending on market prices at the time of delivery. The purchase
prices that we are obligated to pay under fixed price contracts
are established at the inception of the contract. Our estimated
future fixed price contract payment obligations are based on the
contracted fixed price under each commodity contract.
Obligations shown in the table represent estimated payment
obligations under these contracts for the periods indicated. |
Cash
Distributions
Cash
Distributions Received by Energy Transfer Equity from Energy
Transfer Partners
Currently, our only cash-generating assets are our direct and
indirect partnership interests in ETP. These ETP interests
consist of all of ETPs general partner interest, 100% of
ETPs incentive distribution rights and 62,500,797 ETP
common units held by us.
The total amount of distributions we received from ETP relating
to our limited partner interests, general partner interest and
incentive distribution rights for the periods ended as noted
below is as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Four Months
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Limited Partner Interests
|
|
$
|
167,580
|
|
|
$
|
166,018
|
|
|
$
|
221,878
|
|
|
$
|
70,313
|
|
|
$
|
199,221
|
|
General Partner Interest
|
|
|
14,588
|
|
|
|
12,740
|
|
|
|
17,322
|
|
|
|
5,110
|
|
|
|
13,676
|
|
Incentive Distribution Rights
|
|
|
255,808
|
|
|
|
219,298
|
|
|
|
298,575
|
|
|
|
85,775
|
|
|
|
222,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions received from ETP(1)
|
|
$
|
437,976
|
|
|
$
|
398,056
|
|
|
$
|
537,775
|
|
|
$
|
161,198
|
|
|
$
|
435,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Cash
Distributions to Energy Transfer Equity
Unitholders
Under our partnership agreement, we will distribute all of our
available cash, as defined, within 50 days following the
end of each fiscal quarter. Available cash generally means, with
respect to any quarter, all cash on hand at the end of such
quarter less the amount of cash reserves that are necessary or
appropriate in the reasonable discretion of our general partner
that is necessary or appropriate to provide for future cash
requirements.
S-73
Distributions declared by us are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Amount per Unit
|
|
Calendar Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
November 9, 2009
|
|
November 19, 2009
|
|
$
|
0.5350
|
|
|
|
August 7, 2009
|
|
August 19, 2009
|
|
|
0.5350
|
|
|
|
May 8, 2009
|
|
May 19, 2009
|
|
|
0.5250
|
|
|
|
February 6, 2009
|
|
February 19, 2009
|
|
|
0.5100
|
|
Calendar Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
November 10, 2008
|
|
November 19, 2008
|
|
$
|
0.4800
|
|
|
|
August 7, 2008
|
|
August 19, 2008
|
|
|
0.4800
|
|
|
|
May 5, 2008
|
|
May 19, 2008
|
|
|
0.4400
|
|
|
|
February 1, 2008(1)
|
|
February 19, 2008
|
|
|
0.5500
|
|
Transition Period Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
October 5, 2007
|
|
October 19, 2007
|
|
$
|
0.3900
|
|
Fiscal Year Ended August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
July 2, 2007
|
|
July 19, 2007
|
|
$
|
0.3725
|
|
|
|
April 9, 2007
|
|
April 16, 2007
|
|
|
0.3560
|
|
|
|
January 4, 2007
|
|
January 19, 2007
|
|
|
0.3400
|
|
|
|
October 5, 2006
|
|
October 19, 2006
|
|
|
0.3125
|
|
|
|
|
(1) |
|
One-time four-month distribution On January 18,
2008 our Board of Directors approved the management
recommendation for a one-time four-month distribution for our
unitholders to complete the conversion to a calendar year end
from the previous August 31 fiscal year end. Our distribution
amount related to the four months ended December 31, 2007
was $0.55 per common unit, representing a distribution of $0.41
per unit for the three-month period and $0.14 per unit for the
additional month. This distribution was paid on
February 19, 2008 to our unitholders of record as of the
close of business on February 1, 2008. |
Cash
Distributions to Energy Transfer Partners
Unitholders
Distributions paid by ETP are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Amount per Unit
|
Calendar Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
November 9, 2009
|
|
November 16, 2009
|
|
$
|
0.89375
|
|
|
|
August 7, 2009
|
|
August 14, 2009
|
|
|
0.89375
|
|
|
|
May 8, 2009
|
|
May 15, 2009
|
|
|
0.89375
|
|
|
|
February 6, 2009
|
|
February 13, 2009
|
|
|
0.89375
|
|
Calendar Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
November 10, 2008
|
|
November 14, 2008
|
|
$
|
0.89375
|
|
|
|
August 7, 2008
|
|
August 14, 2008
|
|
|
0.89375
|
|
|
|
May 5, 2008
|
|
May 15, 2008
|
|
|
0.86875
|
|
|
|
February 1, 2008(1)
|
|
February 14, 2008
|
|
|
1.12500
|
|
Transition Period Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
October 5, 2007
|
|
October 15, 2007
|
|
$
|
0.82500
|
|
Fiscal Year Ended August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
July 2, 2007
|
|
July 19, 2007
|
|
$
|
0.80625
|
|
|
|
April 6, 2007
|
|
April 13, 2007
|
|
|
0.78750
|
|
|
|
January 4, 2007
|
|
January 15, 2007
|
|
|
0.76875
|
|
|
|
October 5, 2006
|
|
October 16, 2006
|
|
|
0.75000
|
|
|
|
|
(1) |
|
One-time four-month distribution On January 18,
2008 the Board of Directors of ETP GP approved the management
recommendation for a one-time four-month distribution for ETP
unitholders to complete the conversion to a calendar year end
from the previous August 31 fiscal year end. ETPs
distribution amount related to the four months ended
December 31, 2007 was $1.125 per common unit, representing
a distribution of $0.84375 per unit for the three-month period
and $0.28125 per unit for the additional month. This
distribution was paid on February 14, 2008 to ETPs
unitholders of record as of the close of business on
February 1, 2008. |
S-74
Estimates
and Critical Accounting Policies
The selection and application of accounting policies is an
important process that has developed as our business activities
have evolved and as the accounting rules have developed.
Accounting rules generally do not involve a selection among
alternatives, but involve an implementation and interpretation
of existing rules, and the use of judgment applied to the
specific set of circumstances existing in our business. We make
every effort to properly comply with all applicable rules on or
before their adoption, and we believe the proper implementation
and consistent application of the accounting rules are critical.
Our critical accounting policies are discussed below. For
further details on our accounting policies and a discussion of
new accounting pronouncements, please see New
Accounting Standards and Changes to Significant Accounting
Policies.
Use of Estimates. The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts of assets
and liabilities and accruals for and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. The natural gas industry conducts its business
by processing actual transactions at the end of the month
following the month of delivery. Consequently, the most current
months financial results for the midstream and intrastate
transportation and storage segments are estimated using volume
estimates and market prices. Any differences between estimated
results and actual results are recognized in the following
months financial statements. Management believes that the
operating results estimated for the year ended December 31,
2008 represent the actual results in all material respects.
Some of the other more significant estimates made by management
include, but are not limited to, the timing of certain
forecasted transactions that are hedged, allowances for doubtful
accounts, the fair value of derivative instruments, useful lives
for depreciation and amortization, purchase accounting
allocations and subsequent realizability of intangible assets,
estimates related to our unit-based compensation plans, deferred
taxes, assets and liabilities resulting from the regulated
ratemaking process, contingency reserves and environmental
reserves. Actual results could differ from those estimates.
Revenue Recognition. Revenues for sales of
natural gas, NGLs including propane, and propane appliances,
parts, and fittings are recognized at the later of the time of
delivery of the product to the customer or the time of sale or
installation. Revenue from service labor, transportation,
treating, compression, and gas processing, is recognized upon
completion of the service. Transportation capacity payments are
recognized when earned in the period the capacity is made
available. Tank rent is recognized ratably over the period it is
earned.
Results from the midstream segment are determined primarily by
the volumes of natural gas gathered, compressed, treated,
processed, purchased and sold through ETPs pipeline and
gathering systems and the level of natural gas and NGL prices.
ETP generates midstream revenues and gross margins principally
under fee-based or other arrangements in which ETP receives a
fee for natural gas gathering, compressing, treating or
processing services. The revenue earned from these arrangements
is directly related to the volume of natural gas that flows
through ETPs systems and is not directly dependent on
commodity prices.
ETP also utilizes other types of arrangements in its midstream
segment, including
(i) discount-to-index
price arrangements, which involve purchases of natural gas at
either (1) a percentage discount to a specified index
price, (2) a specified index price less a fixed amount or
(3) a percentage discount to a specified index price less
an additional fixed amount,
(ii) percentage-of-proceeds
arrangements under which ETP gathers and processes natural gas
on behalf of producers, sells the resulting residue gas and NGL
volumes at market prices and remits to producers an agreed upon
percentage of the proceeds based on an index price, and
(iii) keep-whole arrangements where ETP gathers natural gas
from the producer, processes the natural gas and sells the
resulting NGLs to third parties at market prices. In many cases,
ETP provides services under contracts that contain a combination
of more than one of the arrangements described above. The terms
of ETPs contracts vary based on gas quality conditions,
the competitive environment at the time the contracts are signed
and customer requirements. ETPs contract mix may change as
a result of changes in producer preferences, expansion in
regions where some types of contracts are more common and other
market factors.
S-75
ETP conducts marketing operations in which it markets the
natural gas that flows through its assets, referred to as
on-system gas. ETP also attracts other customers by marketing
volumes of natural gas that do not move through ETPs
assets, referred to as off-system gas. For both on-system and
off-system gas, ETP purchases natural gas from natural gas
producers and other supply points and sells that natural gas to
utilities, industrial consumers, other marketers and pipeline
companies, thereby generating gross margins based upon the
difference between the purchase and resale prices.
ETP has a risk management policy that provides for its marketing
and trading operations to execute limited strategies. These
activities are monitored independently by ETPs risk
management function and must take place within predefined limits
and authorizations. Certain strategies are considered trading
activities for accounting purposes and are accounted for on a
net basis in revenues on the consolidated statements of
operations. ETPs trading activities include purchasing and
selling natural gas and the use of financial instruments,
including basis contracts and gas daily contracts.
Revenue and costs related to ETPs energy trading contracts
are presented on a net basis in the statement of operations. As
a result of ETPs trading activities and the use of
derivative financial instruments that may not qualify for hedge
accounting in its midstream and intrastate transportation and
storage segments, the degree of earnings volatility that can
occur may be significant, favorably or unfavorably, from period
to period. ETP attempts to manage this volatility through the
use of daily position and profit and loss reports provided to
the risk management committee, which includes members of senior
management, and predefined limits and authorizations set forth
by ETPs risk management policy.
ETPs intrastate transportation and storage and interstate
transportation segments results are determined primarily by the
amount of capacity its customers reserve as well as the actual
volume of natural gas that flows through the transportation
pipelines. Under transportation contracts, ETPs customers
are charged (i) a demand fee, which is a fixed fee for the
reservation of an agreed amount of capacity on the
transportation pipeline for a specified period of time and which
obligates the customer to pay even if the customer does not
transport natural gas on the respective pipeline, (ii) a
transportation fee, which is based on the actual throughput of
natural gas by the customer, (iii) a fuel retention based
on a percentage of gas transported on the pipeline, or
(iv) a combination of the three, generally payable monthly.
ETPs intrastate transportation and storage segment also
generates its revenues and margin from fees charged for storing
customers working natural gas in ETPs storage
facilities, primarily on the ET Fuel system, and to a lesser
extent, on the HPL System.
ETPs intrastate transportation and storage segment also
generates revenues and margin from the sale of natural gas to
electric utilities, independent power plants, local distribution
companies, industrial end-users, and other marketing companies
on the HPL System. Generally, ETP purchases natural gas from the
market, including purchases from the midstream segments
marketing operations, and from producers at the wellhead. To the
extent the natural gas is obtained from producers, it is
purchased at a discount to a specified price and is typically
resold to customers at a price based on a published index.
ETP engages in natural gas storage transactions in which it
seeks to find and profit from pricing differences that occur
over time utilizing the Bammel storage reservoir on its HPL
System. ETP purchases physical natural gas and then sells
financial contracts at a price sufficient to cover its carrying
costs and provide for a gross profit margin. Since the
acquisition of the HPL System, ETP has continually managed its
positions to enhance the future profitability of its storage
position. ETP expects margins from the HPL System to be higher
during the periods from November to March of each year and lower
during the period from April through October of each year due to
the increased demand for natural gas during colder weather.
However, ETP cannot assure that managements expectations
will be fully realized in the future and in what time period,
due to various factors including weather, availability of
natural gas in regions in which ETP operates, competitive
factors in the energy industry, and other issues.
Regulatory Assets and
Liabilities. Transwestern is subject to
regulation by certain state and federal authorities, is part of
ETPs interstate transportation segment and has accounting
policies that conform to the accounting requirements and
ratemaking practices of the regulatory authorities. The
application of these accounting policies allows ETP to defer
expenses and revenues on the balance sheet as regulatory assets
and
S-76
liabilities when it is probable that those expenses and revenues
will be allowed in the ratemaking process in a period different
from the period in which they would have been reflected in the
consolidated statement of operations by an unregulated company.
These deferred assets and liabilities will be reported in
results of operations in the period in which the same amounts
are included in rates and recovered from or refunded to
customers. Managements assessment of the probability of
recovery or pass through of regulatory assets and liabilities
will require judgment and interpretation of laws and regulatory
commission orders. If, for any reason, ETP ceases to meet the
criteria for application of regulatory accounting treatment for
all or part of its operations, the regulatory assets and
liabilities related to those portions ceasing to meet such
criteria would be eliminated from the consolidated balance sheet
for the period in which the discontinuance of regulatory
accounting treatment occurs.
Fair Value of Derivative Commodity
Contracts. ETP utilizes various exchange-traded
and
over-the-counter
commodity financial instrument contracts to limit its exposure
to margin fluctuations in natural gas, NGL and propane prices
and in its trading activities. These contracts consist primarily
of commodity forwards, futures, swaps, options and certain basis
contracts as cash flow hedging instruments. Certain contracts
are not accounted for as hedges and the gains and losses
resulting from changes in the fair value of these contracts are
recorded on a current basis on the statement of operations. In
ETPs retail propane business, ETP classifies all gains and
losses from these derivative contracts entered into for risk
management purposes as liquids marketing revenue in the
consolidated statement of operations. The gains and losses on
the natural gas derivative contracts that are entered into for
trading purposes are recognized in the midstream and intrastate
transportation and storage revenue on a net basis in the
consolidated statement of operations. The non-trading gains and
losses for natural gas contracts are recorded as cost of
products sold in the consolidated statement of operations. On
ETPs contracts that are designated as cash flow hedges,
the effective portion of the hedged gain or loss is initially
reported as a component of other comprehensive income and is
subsequently reclassified into earnings when the physical
transaction settles. The ineffective portion of the gain or loss
is reported in earnings immediately. ETP utilizes published
settlement prices for exchange-traded contracts, quotes provided
by brokers, and estimates of market prices based on daily
contract activity to estimate the fair value of these contracts.
ETP also uses the Black-Scholes valuation model to estimate the
value of certain options. Changes in the methods used to
determine the fair value of these contracts could have a
material effect on ETPs results of operations. ETP does
not anticipate future changes in the methods used to determine
the fair value of these derivative contracts. See
Quantitative and Qualitative Disclosures about
Market Risk for further discussion regarding our
derivative activities.
Financial Assets and Liabilities at Fair
Value. We have marketable securities, commodity
derivatives and interest rate derivatives that are accounted for
as assets and liabilities at fair value in our consolidated
balance sheets. We determine the fair value of our financial
assets and liabilities subject to fair value measurement by
using the highest possible Level. Level 1
inputs are observable quotes in an active market for identical
assets and liabilities. We consider the valuation of marketable
securities and commodity derivatives transacted through a
clearing broker with a published price from the appropriate
exchange as a Level 1 valuation. Level 2 inputs are
inputs observable for similar assets and liabilities. We
consider
over-the-counter,
or OTC, commodity derivatives entered into directly with third
parties Level 2 valuation since the values of these
derivatives are quoted on an exchange for similar transactions.
We consider the valuation of our interest rate derivatives as
Level 2 since we use a LIBOR curve based on quotes from an
active exchange of Eurodollar futures for the same period as the
future interest swap settlements and discount the future cash
flows accordingly, including the effects of our credit risk.
Level 3 utilizes significant unobservable inputs. We
currently do not have any assets or liabilities considered as
Level 3 valuations.
Impairment of Long-Lived Assets and
Goodwill. Long-lived assets are required to be
tested for recoverability whenever events or changes in
circumstances indicate that the carrying amount of the asset may
not be recoverable. Goodwill and intangibles with indefinite
lives must be tested for impairment annually or more frequently
if events or changes in circumstances indicate that the related
asset might be impaired. An impairment loss should be recognized
only if the carrying amount of the asset/goodwill is not
recoverable and exceeds its fair value.
S-77
In order to test for recoverability, ETP must make estimates of
projected cash flows related to the asset which include, but are
not limited to, assumptions about the use or disposition of the
asset, estimated remaining life of the asset, and future
expenditures necessary to maintain the assets existing
service potential. In order to determine fair value, ETP makes
certain estimates and assumptions, including, among other
things, changes in general economic conditions in regions in
which its markets are located, the availability and prices of
natural gas and propane supply, its ability to negotiate
favorable sales agreements, the risks that natural gas
exploration and production activities will not occur or be
successful, its dependence on certain significant customers and
producers of natural gas, and competition from other midstream
companies, including major energy producers. Due to the
subjectivity of the assumptions used to test for recoverability
and to determine fair value, significant impairment charges
could result in the future, thus affecting ETPs future
reported net income.
Property, Plant, and Equipment. Maintenance
capital expenditures are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the
existing operating capacity of ETPs assets and to extend
their useful lives. Maintenance capital expenditures also
include capital expenditures made to connect additional wells to
ETPs systems in order to maintain or increase throughput
on its existing assets. Growth or expansion capital expenditures
are capital expenditures made to expand the existing operating
capacity of ETPs assets, whether through construction or
acquisition. ETP treats repair and maintenance expenditures that
do not extend the useful life of existing assets as operating
expenses as ETP incurs them. Upon disposition or retirement of
pipeline components or gas plant components, any gain or loss is
recorded to accumulated depreciation. When entire pipeline
systems, gas plants or other property and equipment are retired
or sold, any gain or loss is included in the consolidated
statement of operations. Depreciation of property, plant and
equipment is provided using the straight-line method based on
their estimated useful lives ranging from 3 to 80 years.
Changes in the estimated useful lives of the assets could have a
material effect on ETPs results of operation. ETP does not
anticipate future changes in the estimated useful lives of our
property, plant, and equipment.
Asset Retirement Obligation. An entity is
required to recognize the fair value of a liability for an asset
retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. If a reasonable
estimate cannot be made in the period the asset retirement
obligation is incurred, the liability should be recognized when
a reasonable estimate of fair value can be made.
In order to determine fair value, management must make certain
estimates and assumptions including, among other things,
projected cash flows, a credit-adjusted risk-free rate, and an
assessment of market conditions that could significantly impact
the estimated fair value of the asset retirement obligation.
These estimates and assumptions are very subjective. ETP has
determined that it is obligated by contractual or regulatory
requirements to remove assets or perform other remediation upon
retirement of certain assets. However, the fair value of
ETPs asset retirement obligation cannot currently be
reasonably estimated because the settlement dates are
indeterminate. ETP will record an asset retirement obligation in
the periods in which it can reasonably determine the settlement
dates.
Legal Matters. We are subject to litigation
and regulatory proceedings as a result of ETPs business
operations and transactions. We utilize both internal and
external counsel in evaluating our potential exposure to adverse
outcomes from claims, orders, judgments or settlements. To the
extent that actual outcomes differ from our estimates, or
additional facts and circumstances cause us to revise our
estimates, our earnings will be affected. We expense legal costs
as incurred, and all recorded legal liabilities are revised as
required as better information becomes available to us. The
factors we consider when recording an accrual for contingencies
include, among others: (i) the opinions and views of our
legal counsel; (ii) our previous experience; and
(iii) the decision of our management as to how we intend to
respond to the complaints.
New
Accounting Standards and Changes to Significant Accounting
Policies
Certain adjustments have been made to prior period information
to conform to current period presentation, as discussed more
fully below.
S-78
Accounting Standards Codification. On
July 1, 2009, the Financial Accounting Standards Board, or
FASB, instituted a new referencing system, which codifies, but
does not amend, previously existing nongovernmental GAAP. The
FASB Accounting Standards
Codificationtm,
or ASC, is now the single authoritative source for GAAP.
Although the implementation of ASC has no impact on our
financial statements, certain references to authoritative GAAP
literature have been changed to cite the appropriate content
within the ASC.
Noncontrolling Interests. On January 1,
2009, we adopted SFAS 160, now incorporated into ASC
810-10,
which established new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, the new standard
requires the recognition of a noncontrolling interest (minority
interest) as equity in the condensed consolidated financial
statements and separate from the parents equity. The
amount of net income attributable to the noncontrolling interest
is included in consolidated net income on the face of the income
statement. The new standard clarifies that changes in a
parents ownership interest in a subsidiary that do not
result in deconsolidation are equity transactions if the parent
retains its controlling financial interest. In addition, the new
standard requires that a parent recognizes a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss is
measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. This standard also
includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. The
adoption of this standard did not have a significant impact on
our financial position or results of operations. However, it did
result in certain changes to our financial statement
presentation, including the change in classification of
noncontrolling interest (minority interest) from liabilities to
equity on the condensed consolidated balance sheet.
Upon adoption, we reclassified $2.42 billion from minority
interest liability to noncontrolling interest as a separate
component of equity in our condensed consolidated balance sheet
as of December 31, 2008. In addition, we reclassified
$266.6 million of minority interest expense to net income
attributable to noncontrolling interest in our condensed
consolidated statements of operations for the nine months ended
September 30, 2008. Net income per limited partner unit has
not been affected as a result of the adoption of this standard.
Earnings per Unit. On January 1, 2009, we
adopted a new methodology for calculating earnings per unit to
reflect recently ratified changes to accounting standards. This
new standard was originally issued as Emerging Issues Task Force
Issue
No. 07-4,
Application of the Two-Class Method under FASB Statement
No. 128 to Master Limited Partnerships and is now
incorporated into ASC
260-10. Our
adoption of this standard did not have an impact on the
calculation of ETEs earnings per unit.
On January 1, 2009, we also adopted FASB Staff Position
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities which is
now incorporated into ASC
260-10. This
standard clarifies that unvested share-based payment awards
constitute participating securities, if such awards include
nonforfeitable rights to dividends or dividend equivalents.
Consequently, awards that are deemed to be participating
securities must be allocated earnings in the computation of
earnings per share under the two-class method. Based on unvested
unit awards outstanding at the time of adoption, application of
this standard did not have a material impact on our computation
of earnings per unit.
Business Combinations. On January 1,
2009, we adopted Statement of Financial Accounting Standards
No. 141 (Revised 2007), Business Combinations, which
is now incorporated into ASC 805. The new standard significantly
changes the accounting for business combinations and includes a
substantial number of new disclosure requirements. The new
standard requires an acquiring entity to recognize all the
assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions and changes
the accounting treatment for certain specific items, including:
|
|
|
|
|
Acquisition costs are generally expensed as incurred;
|
|
|
|
Noncontrolling interests (previously referred to as
minority interests) are valued at fair value at the
acquisition date;
|
|
|
|
In-process research and development is recorded at fair value as
an indefinite-lived intangible asset at the acquisition date;
|
S-79
|
|
|
|
|
Restructuring costs associated with a business combination are
generally expensed subsequent to the acquisition date; and
|
|
|
|
Changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date are recorded in
income taxes.
|
Our adoption of this standard did not have an immediate impact
on our financial position or results of operations; however, it
has impacted the accounting for our business combinations
subsequent to adoption.
Derivatives Instruments and Hedging
Activities. On January 1, 2009, we adopted
Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB Statement
No. 133, which is now incorporated into ASC 815. This
standard changed the disclosure requirements for derivative
instruments and hedging activities, including requirements for
qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value
amounts and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative agreements. The standard only affected disclosure
requirements; therefore, our adoption did not impact our
financial position or results of operations.
Equity Method Investment Accounting. On
January 1, 2009, we adopted Emerging Issues Task Force
Issue
No. 08-6,
Equity Method Investment Accounting Considerations, which
is now incorporated into ASC
323-10-35.
This standard establishes the requirements for initial
measurement of an equity method investment, including the
accounting for contingent consideration related to the
acquisition of an equity method investment, and also clarifies
the accounting for (1) an
other-than-temporary
impairment of an equity method investment and (2) changes
in level of ownership or degree of influence with respect to an
equity method investment. Our adoption did not have a material
impact on our financial condition or results of operations.
Subsequent Events. During 2009, we adopted
Statement of Financial Accounting Standards No. 165,
Disclosures about Subsequent Events, which is now
incorporated into ASC 855. Under this standard, we are required
to evaluate subsequent events through the date that our
financial statements are issued and also required to disclose
the date through which subsequent events are evaluated. The
adoption of this standard does not change our current practices
with respect to evaluating, recording and disclosing subsequent
events; therefore, our adoption of this statement during the
second quarter had no impact on our financial position or
results of operations.
Quantitative
and Qualitative Disclosure about Market Risk
Market risk includes the risk of loss arising from adverse
changes in market rates and prices. We and ETP face market risk
from commodity variations, risks related to interest rate
variations, and to a lesser extent, credit risks. From time to
time, ETP may utilize derivative financial instruments as
described below to manage its exposure to such risks.
Commodity
Price Risk
ETP is exposed to commodity price risk from the risk of price
changes in the natural gas, NGLs and propane that ETP buys and
sells in its midstream and intrastate transportation and storage
operations. ETP controls the scope of risk management, marketing
and trading activities through a comprehensive set of policies
and procedures involving senior levels of management. The audit
committee of ETPs Board of Directors has oversight
responsibilities for ETPs risk management limits and
policies. A risk oversight committee, comprised of ETPs
Chief Executive Officer, Chief Financial Officer, Chief
Administrative and Compliance Officer, President and Chief
Operating Officer, Vice President of Administration, Senior Vice
President of Marketing, and Controller of ETPs midstream
and intrastate transportation and storage operations, sets forth
risk management policies and objectives. The committee
establishes procedures for risk assessment, control and
valuation, counterparty credit approval, and the monitoring and
reporting of derivative activity and risk exposures. The trading
activities are subject to the commodity risk management policy
that includes risk management limits, including volume and
stop-loss limits, to manage exposure to market risk. ETP does
not engage in any derivative related activities in its
interstate transportation segment.
S-80
In ETPs retail propane business, the market price of
propane is often subject to volatility as a result of supply or
other market conditions over which ETP has no control. In the
past, price changes have generally been passed along to
ETPs propane customers to maintain gross margins,
mitigating the commodity price risk. In order to help ensure
adequate supply sources are available to ETP during periods of
high demand, ETP will at times purchase significant volumes of
propane at the current market prices during periods of low
demand, which generally occur during the summer months. The
propane is then stored at both ETPs customer service
locations and in major storage facilities for future resale.
Non-trading
Activities
ETP uses a combination of derivative financial instruments
including, but not limited to, futures, price swaps, options and
basis swaps to manage its exposure to market fluctuations in the
prices of natural gas, NGLs and propane. Swaps and futures allow
ETP to protect its margins because corresponding losses or gains
in the value of financial instruments are generally offset by
gains or losses in the physical market.
The use of financial instruments may expose ETP to the risk of
financial loss in certain circumstances, including instances
when (1) sales volumes are less than expected, or
(2) its counterparties fail to purchase the contracted
quantities of natural gas or propane or otherwise fail to
perform. To the extent that ETP engages in derivative
activities, it may be prevented from realizing the benefits of
favorable price changes in the physical market. However, ETP is
similarly protected against decreases in such prices on these
transactions.
ETP manages its price risk related to future physical purchase
or sale commitments for its marketing activities by entering
into either corresponding physical delivery contracts or
financial instruments with an objective to balance its future
commitments and significantly reduce its risk to the movement in
prices. However, ETP is subject to counterparty risk for both
the physical and financial contracts. ETP also utilizes forward
purchase contracts to acquire a portion of the propane that it
resells to its customers, which allows ETP to manage its
exposure to unfavorable changes in commodity prices and to
assure adequate physical supply. ETP accounts for such physical
contracts as normal purchases and sales exception
and, as such, does not record these contracts at fair value on
their balance sheet.
In connection with the acquisition of the HPL System, ETP
acquired certain physical forward contracts that contain
embedded options that ETP has not designated as a normal
purchase and sale nor were the contracts designated as hedges.
These contracts are marked to market, along with the financial
options that offset them, and are recorded in the statement of
operations and on ETPs consolidated balance sheet as a
component of price risk management assets and liabilities. As of
December 31, 2008, these contracts have settled and are no
longer reflected on ETPs consolidated balance sheet.
In ETPs midstream and intrastate transportation and
storage segments, ETP accounts for certain of its derivatives as
cash flow hedges. All derivatives are recognized on the balance
sheet at fair value as price risk management assets and
liabilities. If ETP designates a derivative financial instrument
as a cash flow hedge and it qualifies for hedge accounting, a
change in the fair value is deferred in Accumulated Other
Comprehensive Income, or AOCI, until the underlying hedged
transaction is recorded in earnings. Any ineffective portion of
a cash flow hedges change in fair value is recognized each
period in earnings. Realized gains and losses on derivative
financial instruments that are designated as cash flow hedges
are included in cost of products sold in the period the hedged
transactions is recorded in earnings. Gains and losses deferred
in AOCI related to cash flow hedges remain in AOCI until the
underlying physical transactions are recorded in earnings,
unless it is probable that the forecasted transaction will not
occur by the end of the originally specified time period or
within an additional two-month period of time thereafter. For
those financial derivative instruments that do not qualify for
hedge accounting, the change in market value is recorded each
period in cost of products sold in the consolidated statements
of operations.
ETP attempts to maintain balanced positions in its midstream and
intrastate transportation and storage segments to protect it
from the volatility in the energy commodities markets. To the
extent open commodity positions exist, fluctuating commodity
prices can impact ETPs financial results either favorably
or unfavorably.
S-81
Trading
Activities
Due to a high level of market volatility as well as other
business considerations, as of July 2008 ETP determined that it
will no longer engage in the trading of financial derivative
instruments that are not offset by physical positions. As a
result, ETP will no longer have any material exposure to market
risk from such derivative positions. The derivative contracts
that were previously entered into for trading purposes are
recognized in the consolidated balance sheets at fair value, and
changes in the fair value of these derivative instruments are
recognized each period in midstream and intrastate
transportation and storage revenue in the consolidated
statements of operations on a net basis.
ETPs commodity-related price risk management assets and
liabilities as of September 30, 2009 were as follows:
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Fair Value
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Notional
|
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Asset
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Commodity
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|
Volume
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Maturity
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(Liability)
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(in thousands)
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Mark to Market Derivatives
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Basis Swaps IFERC/NYMEX (MMBtu)
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Natural Gas
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|
78,932,500
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2009-2011
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$
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16,291
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|
Swing Swaps IFERC (MMBtu)
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Natural Gas
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(53,500,000
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)
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2009-2010
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3,389
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Fixed Swaps/Futures (MMBtu)
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Natural Gas
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(3,755,000
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)
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2009-2011
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3,527
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Forwards/Swaps (Gallons)
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Propane/Ethane
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11,718,000
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2009-2010
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2,447
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Fair Value Hedging Derivatives
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Basis Swaps IFERC/NYMEX (MMBtu)
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Natural Gas
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(31,095,000
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)
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2009-2010
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$
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(6,235
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)
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Fixed Swaps/Futures (MMBtu)
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Natural Gas
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(31,967,500
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)
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2009-2010
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(7,341
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)
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Cash Flow Hedging Derivatives
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Basis Swaps IFERC/NYMEX (MMBtu)
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Natural Gas
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(16,830,000
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)
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2009-2010
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$
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(390
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)
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Fixed Swaps/Futures (MMBtu)
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Natural Gas
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(27,625,000
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)
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2009-2010
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(18,675
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)
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Forwards/Swaps (Gallons)
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Propane/Ethane
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28,518,000
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2009-2010
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4,312
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Credit
Risk
ETP maintains credit policies with regard to its counterparties
that it believes significantly minimize overall credit risk.
These policies include an evaluation of potential
counterparties financial condition (including credit
ratings), collateral requirements under certain circumstances
and the use of standardized agreements, which allow for netting
of positive and negative exposure associated with a single
counterparty.
ETPs counterparties consist primarily of financial
institutions, major energy companies and local distribution
companies. This concentration of counterparties may impact our
overall exposure to credit risk, either positively or negatively
in that the counterparties may be similarly affected by changes
in economic, regulatory or other conditions. For financial
instruments, failure of a counterparty to perform on a contract
could result in ETPs inability to realize amounts that
have been recorded on our condensed consolidated balance sheets
and recognized in net income or other comprehensive income. For
additional discussion of ETPs credit risks, please see
Risk Factors.
S-82
Sensitivity
Analysis
The table below summarizes ETPs commodity-related
financial derivative instruments and fair values as of
September 30, 2009, as well as the effect of an assumed
hypothetical 10% change in the underlying price of the commodity.
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Fair Value
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Effect of
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Notional
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Asset
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Hypothetical
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Commodity
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Volume
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(Liability)
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10% Change
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(in thousands)
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(in thousands)
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Mark to Market Derivatives
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Basis Swaps IFERC/NYMEX (MMBtu)
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Natural Gas
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78,932,500
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$
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16,291
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$
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2,887
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Swing Swaps IFERC (MMBtu)
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Natural Gas
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(53,500,000
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)
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3,389
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884
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Fixed Swaps/Futures (MMBtu)
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Natural Gas
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(3,755,000
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)
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3,527
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2,931
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Forwards/Swaps (Gallons)
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Propane/Ethane
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11,718,000
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2,447
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1,120
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Fair Value Hedging Derivatives
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Basis Swaps IFERC/NYMEX (MMBtu)
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Natural Gas
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(31,095,000
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)
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$
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(6,235
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)
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$
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411
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Fixed Swaps/Futures (MMBtu)
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Natural Gas
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(31,967,500
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)
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(7,341
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)
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16,286
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Cash Flow Hedging Derivatives
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Basis Swaps IFERC/NYMEX (MMBtu)
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Natural Gas
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(16,830,000
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)
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$
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(390
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)
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$
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267
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Fixed Swaps/Futures (MMBtu)
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Natural Gas
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(27,625,000
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)
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(18,675
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)
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16,459
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Forwards/Swaps (Gallons)
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Propane/Ethane
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28,518,000
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4,312
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2,724
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The fair values of the commodity-related financial positions
have been determined using independent third-party prices,
readily available market information, broker quotes and
appropriate valuation techniques. Non-trading positions offset
physical exposures to the cash market; none of these offsetting
physical exposures are included in the above tables. Price-risk
sensitivities were calculated by assuming a theoretical 10%
change (increase or decrease) in price regardless of term or
historical relationships between the contractual price of the
instruments and the underlying commodity price. Results are
presented in absolute terms and represent a potential gain or
loss in our condensed consolidated results of operations or in
other comprehensive income. In the event of an actual 10% change
in prompt month natural gas prices, the fair value of ETPs
total derivative portfolio may not change by 10% due to factors
such as when the financial instrument settles and the location
to which the financial instrument is tied (i.e., basis swaps)
and the relationship between prompt month and forward months.
Interest
Rate Risk
We and ETP are exposed to market risk for increases in interest
rates, primarily as a result of our revolving credit facilities,
which have variable interest rates, and our interest rate swaps.
To the extent interest rates increase, our and ETPs
interest expense under these revolving credit facilities will
increase. At September 30, 2009, we had $2.06 billion
of variable rate debt outstanding and we have $2.00 billion
of interest rate swaps where we pay fixed and receive floating
LIBOR. Interest swaps with a notional amount of
$700.0 million are designated as hedges and changes in fair
value are recorded in accumulated other comprehensive income.
Interest swaps with a notional amount of $1.30 billion have
their changes in fair value recorded in gains (losses) on
non-hedged interest rate derivatives on the condensed
consolidated statements of operations. A hypothetical change of
100 basis points in the underlying interest rates on our
variable rate debt and swaps accounted for as hedges would
result in a net change in interest expense of approximately
$13.6 million on an annual basis. We have non-hedged
interest rate derivatives with a notional amount of
$500.0 million that settle in December 2009, and a
hypothetical decrease of 100 basis points in the LIBOR
yield curve prior to settlement would result in unrealized
losses of $44.6 million recorded in other income. With
respect to the non-hedged interest rate derivatives that settle
beyond 2009, which have a notional amount of $800.0 million
in the aggregate, a hypothetical decrease of 100 basis
points in the LIBOR yield curve would result in unrealized
losses recorded in other income of $31.9 million on an
annual basis. Assuming corresponding parallel shifts in the
LIBOR yield curve and the underlying interest rates on our
variable rate
S-83
debt, the decrease in interest expense from our variable rate
debt would slightly offset the impact to net income from
unrealized losses on our non-hedged interest rate derivatives.
We and ETP also have long-term debt instruments which are
typically issued at fixed interest rates. Prior to or when these
debt obligations mature, we and ETP may refinance all or a
portion of such debt at then-existing market interest rates
which may be more or less than the interest rates on the
maturing debt.
S-84
BUSINESS
Our only cash generating assets are our direct and indirect
investments in limited partner and general partner interests in
ETP. Our direct and indirect ownership of ETP consist of
approximately 62.5 million common units, an approximate
1.8% general partner interest and 100% of the incentive
distribution rights.
Overview
of ETPs Operations
Currently, our business operations are conducted only through
ETPs subsidiaries. The activities in which ETP is engaged,
all of which are in the United States, and ETPs
subsidiaries through which it conducts those activities are as
follows:
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Natural gas operations, consisting of the following segments:
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natural gas midstream and intrastate transportation and storage
through La Grange Acquisition, L.P., which conducts
business under the assumed name of Energy Transfer Company, or
ETC OLP; and
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interstate natural gas transportation services through ET
Interstate, the parent company of Transwestern and ETC MEP.
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Retail propane through HOLP and Titan.
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Segment
Overview and Business Description
ETPs segments and business are as described below. For
additional financial information about ETPs segments,
please see the notes to our consolidated financial statements,
which are incorporated by reference from our Annual Report on
Form 10-K
for the year ended December 31, 2008.
Natural
Gas Operations
The following map depicts the major components of ETPs
natural gas operations:
S-85
Intrastate
Transportation Pipelines and Storage Facilities
ET Fuel
System
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Capacity of 5.2 Bcf/d
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2,570 miles of natural gas pipeline
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2 storage facilities with 12.4 Bcf of total working gas
capacity
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Oasis
pipeline
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Capacity of 1.2 Bcf/d
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600 miles of natural gas pipeline
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Connects Waha to Katy market hubs
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HPL
System
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Capacity of 5.5 Bcf/d
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4,300 miles of natural gas pipeline
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|
Bammel storage facility with 62 Bcf of total working gas
capacity
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East
Texas pipeline
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Capacity of 2.4 Bcf/d
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370 miles of natural gas pipeline
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Interstate
Transportation Pipelines
Transwestern
pipeline
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Capacity of 2.1 Bcf/d
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2,700 miles of interstate natural gas pipeline
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Phoenix lateral pipeline 260 miles of
36-inch and
42-inch
diameter pipeline with capacity of
500 MMcf/d
was completed in February 2009
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Midcontinent
Express pipeline
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|
Current capacity of 1.4 Bcf/d on zone 1 and 1.0 Bcf/d
on zone 2
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Planned capacity expansion to 1.8 Bcf/d on zone 1 and
1.2 Bcf/d on zone 2 by July 2010
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|
500 miles of interstate natural gas pipeline
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50/50 joint venture with KMP
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Fayetteville
Express pipeline
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Initial planned capacity of 2.0 Bcf/d (expected to be in
service in the fourth quarter of 2010)
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187 miles of interstate natural gas pipeline
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50/50 joint venture with KMP
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S-86
Tiger
pipeline
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Initial planned capacity of 2.0 Bcf/d (expected to be in
service in the first half of 2011)
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|
178 miles of interstate natural gas pipeline
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Midstream
Southeast
Texas System
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|
5,200 miles of natural gas pipeline
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|
1 natural gas processing plant (the La Grange plant) with
aggregate capacity of
240 MMcf/d
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11 natural gas treating facilities with aggregate capacity of
1.3 Bcf/d
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|
4 natural gas conditioning facilities with aggregate capacity of
670 MMcf/d
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North
Texas System
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|
160 miles of natural gas pipeline
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|
1 natural gas processing plant (the Godley plant) with aggregate
capacity of
500 MMcf/d
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|
1 natural gas conditioning facility with capacity of
100 MMcf/d
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Canyon
Gathering System
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1,390 miles of natural gas pipeline
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6 natural gas conditioning facilities with aggregate capacity of
90 MMcf/d
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Intrastate
Transportation and Storage Segment
ETPs intrastate transportation and storage business owns
and operates approximately 8,000 miles of natural gas
transportation pipelines and three natural gas storage
facilities.
Through ETC OLP, ETP owns the largest intrastate pipeline system
in the United States with interconnects to major consumption
areas throughout the United States. ETPs intrastate
transportation and storage segment focuses on the transportation
of natural gas between major markets from various natural gas
producing areas through connections with other pipeline systems
as well as through ETPs Oasis pipeline, East Texas
pipeline, its natural gas pipeline and storage assets that are
referred to as the ET Fuel System, and ETPs HPL System,
which are described below.
ETPs intrastate transportation and storage operations
accounted for approximately 54% of its total consolidated
operating income for the nine months ended September 30,
2009. The results from ETPs intrastate transportation and
storage segment are primarily derived from the fees ETP charges
to transport natural gas on its pipelines, including a fuel
retention component. ETP also generates revenues and margin from
the sale of natural gas to electric utilities, independent power
plants, local distribution companies, industrial end-users, and
other marketing companies on the HPL System. Generally, ETP
purchases natural gas from either the market (including
purchases from its midstream segments marketing
operations) or from producers at the wellhead. To the extent the
natural gas comes from producers, it is purchased at a discount
to a specified price and resold to customers based on an index
price.
The following is a brief description of the various components
of ETPs intrastate transportation and storage segment:
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|
The ET Fuel System, which serves some of the most active
drilling areas in the United States, is comprised of
approximately 2,570 miles of intrastate natural gas
pipeline and related natural gas storage facilities. With
approximately 460 receipt
and/or
delivery points, including interconnects with pipelines
providing direct access to power plants and interconnects with
other intrastate and interstate pipelines,
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S-87
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the ET Fuel System is strategically located near high-growth
production areas and provides access to the Waha Hub near
Midland, Texas, the Katy Hub near Houston, Texas and the
Carthage Hub in east Texas, the three major natural gas trading
centers in Texas. The ET Fuel System has total system throughput
capacity of approximately
5.2 Bcf/d.
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The ET Fuel System also includes ETPs Bethel natural gas
storage facility, with a working capacity of 6.4 Bcf, an
average withdrawal capacity of
300 MMcf/d
and an average injection capacity of
75 MMcf/d,
and ETPs Bryson natural gas storage facility, with a
working capacity of 6.0 Bcf, an average withdrawal capacity
of
120 MMcf/d
and an average injection capacity of
96 MMcf/d.
During the third quarter of 2009, ETP completed its Texas
Independence Pipeline, which consists of approximately
150 miles of
42-inch
diameter pipeline connecting the ET Fuel System and North Texas
System with ETPs East Texas pipeline. The Texas
Independence Pipeline expands ETPs ET Fuel System
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 addition, the ET Fuel System is connected with ETPs
Godley plant. This gives ETP the ability to bypass the plant
when processing margins are unfavorable by blending the
un-treated natural gas from the North Texas System with natural
gas on the ET Fuel System while continuing to meet pipeline
quality specifications.
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|
The Oasis pipeline is primarily a
36-inch
diameter,
600-mile
intrastate natural gas pipeline that directly connects the Waha
Hub to the Katy Hub. It has bi-directional capability with
approximately 1.2 Bcf/d of throughput capacity moving
west-to-east
and greater than
750 MMcf/d
of throughput capacity moving
east-to-west.
The Oasis pipeline has many interconnections with other
pipelines, power plants, processing facilities, municipalities
and producers.
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The Oasis pipeline is integrated with ETPs Southeast Texas
System and is an important component to maximizing ETPs
Southeast Texas Systems profitability. The Oasis pipeline
enhances the Southeast Texas System by:
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providing ETP with the ability to bypass the La Grange
processing plant when processing margins are unfavorable;
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providing access for natural gas on the Southeast Texas System
to other third-party supply and market points and
interconnecting pipelines; and
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allowing ETP to bypass its treating facilities on the Southeast
Texas System and blend untreated natural gas from the Southeast
Texas System with gas on the Oasis pipeline while continuing to
meet pipeline quality specifications.
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The HPL System is comprised of approximately 4,300 miles of
intrastate natural gas pipeline with an aggregate capacity of
5.5 Bcf/d, the underground Bammel storage reservoir and
related transportation assets. The system has access to multiple
sources of historically significant natural gas supply reserves
from south Texas, the Gulf Coast of Texas, east Texas and the
western Gulf of Mexico, and is directly connected to major gas
distribution, electric and industrial load centers in Houston,
Corpus Christi, Texas City and other cities located along the
Gulf Coast of Texas. The HPL System also includes 32 miles
of the Cleburne to Carthage pipeline from ETPs Texoma
pipeline interconnect to the Carthage Hub. The HPL System is
well situated to gather gas in many of the major gas producing
areas in Texas and has a particularly strong presence in the key
Houston Ship Channel and Katy Hub markets, which significantly
contributes to ETPs overall ability to play an important
role in the Texas natural gas markets. The HPL System is also
well positioned to capitalize upon off-system opportunities due
to its numerous interconnections with other pipeline systems,
its direct access to multiple market hubs at Katy, the Houston
Ship Channel and Agua Dulce, and ETPs Bammel storage
facility.
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The Bammel storage facility has a total working gas capacity of
approximately 62 Bcf and has a peak withdrawal rate of
1.3 Bcf/d. The facility also has considerable flexibility
during injection periods in that the HPL System has engineered
an injection well configuration to provide for a 0.6 Bcf/d
peak
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injection rate. The Bammel storage facility is strategically
located near the Houston Ship Channel market area and the Katy
Hub and is ideally suited to provide a physical backup for
on-system and off-system customers.
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The East Texas pipeline is a
370-mile
intrastate natural gas pipeline that connects three treating
facilities, one of which ETP owns, with ETPs Southeast
Texas System. This pipeline was the first phase of a
multi-phased project that increased service to producers in East
and North Central Texas and provided access to the Katy Hub.
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Interstate
Transportation Segment
ETPs interstate transportation segment accounted for
approximately 13% of its total consolidated operating income for
the nine months ended September 30, 2009. The results from
ETPs interstate transportation segment are primarily
derived from the fees earned from natural gas transportation
services and operational gas sales. ETPs interstate
transportation operation began in fiscal 2007 with the
acquisition of the Transwestern pipeline.
The following is a brief description of the various components
of ETPs interstate transportation segment:
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The Transwestern pipeline is an open-access natural gas
interstate pipeline extending from the gas producing regions of
West Texas, eastern and northwest New Mexico, and southern
Colorado primarily to pipeline interconnects off the east end of
its system and to pipeline interconnects at the California
border. Including the recently completed projects listed below,
Transwestern comprises approximately 2,700 miles of
interstate pipeline with a capacity of 2.1 Bcf/d. The
Transwestern pipeline has access to three significant gas
basins: the Permian Basin in West Texas and eastern New Mexico;
the San Juan Basin in northwest New Mexico and southern
Colorado; and the Anadarko Basin in the Texas and Oklahoma
panhandle. Natural gas sources from the San Juan Basin and
surrounding producing areas can be delivered eastward to Texas
intrastate and mid-continent connecting pipelines and natural
gas market hubs as well as westward to markets like Arizona,
Nevada and California. Transwesterns customers include
local distribution companies, producers, marketers, electric
power generators and industrial end-users. Transwestern
transports natural gas in interstate commerce. As a result,
Transwestern qualifies as a natural gas company
under the NGA and is subject to the regulatory jurisdiction of
the FERC. The operating results for Transwestern are included in
ETPs results on a consolidated basis as of the acquisition
date (December 1, 2006).
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During fiscal year 2007, ETP initiated the Phoenix pipeline
expansion project, consisting of 260 miles of
42-inch and
36-inch
diameter pipeline lateral, with a throughput capacity of
500 MMcf/d,
connecting the Phoenix area to Transwesterns existing
mainline at Ash Fork, Arizona and approximately 25 miles of
36-inch
diameter pipeline looping of Transwesterns existing
San Juan Lateral, adding
375 MMcf/d
of capacity. The Phoenix project, as filed with the FERC on
September 15, 2006, includes the construction and operation
of approximately 260 miles of
36-inch or
larger diameter pipeline extending from Transwesterns
existing mainline in Yavapai County, Arizona to delivery points
in the Phoenix, Arizona area and certain looping on
Transwesterns existing San Juan Lateral with
approximately 25 miles of
36-inch
diameter pipeline. The San Juan Lateral portion of the
project was placed in service effective July 2008. The remainder
of this pipeline was placed in service effective March 2009.
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ETPs interstate pipeline segment also includes its
development of the Midcontinent Express Pipeline with KMP. The
Midcontinent Express Pipeline is an approximately
500-mile
interstate natural gas pipeline that will originate near
Bennington, Oklahoma, be routed through Perryville, Louisiana,
and terminate at an interconnect with Transcontinental Gas Pipe
Line Corporations, or Transcos, interstate natural
gas pipeline in Butler, Alabama. Transcos pipeline
provides producers in the Barnett Shale, Bossier Sands, the
Fayetteville Shale in Arkansas and the Woodford/Caney Shale in
Oklahoma access to the significant natural gas markets in the
midwest, northeast, mid-Atlantic and southeast portion of the
United States. The Midcontinent Express Pipeline consists of
266 miles of
42-inch
diameter pipeline, 201 miles of
36-inch
diameter pipeline and 40 miles of
30-inch
diameter pipeline and has multiple receipt and delivery
interconnections. The first zone of the pipeline, from
Bennington,
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Oklahoma to Perryville, Louisiana, was placed in service in
April 2009, and the second zone of the pipeline, from
Perryville, Louisiana to Butler, Alabama, was placed in service
on August 1, 2009. The first zone of the pipeline has an
initial design capacity of 1.5 Bcf/d (taking into account
the planned addition of compression by June 2010) and the
second zone of the pipeline has an initial design capacity of
1.2 Bcf/d. MEP, the entity developing this pipeline, has
received firm transportation commitments from customers for the
full throughput design capacity for periods ranging from five to
ten years. MEP has also received long-term firm transportation
commitments from customers for a 0.3 Bcf/d planned
expansion of the pipeline capacity, through additional
compression, expected to be completed by July 2010.
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In October 2008, ETP entered into a 50/50 joint venture with KMP
for the development of the Fayetteville Express Pipeline, an
approximately
187-mile
42-inch
diameter pipeline that will originate in Conway County,
Arkansas, continue eastward through White County, Arkansas and
terminate at an interconnect with Trunkline Gas Company in
Quitman County, Mississippi. In December 2009, FEP, the entity
formed to own and operate this pipeline, received approval of
its application for FERC authority to construct and operate this
pipeline. The pipeline is expected to have an initial capacity
of 2.0 Bcf/d. On December 17, 2009, the FERC issued an
order granting Fayetteville Express Pipeline authorization to
construct and operate the pipeline, subject to certain
conditions, and FEP accepted the FERCs certificate
authorization on December 18, 2009. Subject to possible
rehearing and judicial review, the pipeline is expected to be in
service by late 2010. FEP has secured binding
10-year
commitments for transportation of quantities with energy
equivalents totaling 1.8 Bcf/d. The new pipeline will
interconnect with Natural Gas Pipeline Company of America, or
NGPL, in White County, Arkansas, Texas Gas Transmission in
Coahoma County, Mississippi, and ANR Pipeline Company in Quitman
County, Mississippi. NGPL is operated and partially owned by
Kinder Morgan, Inc., which owns the general partner of KMP.
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In January 2009, ETP announced that it had entered into an
agreement with a wholly owned subsidiary of Chesapeake Energy
Corporation, or Chesapeake, to construct a
178-mile
42-inch
diameter interstate natural gas pipeline, which we refer to as
the Tiger Pipeline. The pipeline will connect to ETPs dual
42-inch
diameter pipeline system near Carthage, Texas, extend through
the heart of the Haynesville Shale and end near Delhi,
Louisiana, with interconnects to at least seven interstate
pipelines at various points in Louisiana. The Tiger Pipeline is
anticipated to have an initial throughput capacity of
2.0 Bcf/d,
which capacity may be increased up to 2.4 Bcf/d with added
compression. The agreement with Chesapeake provides for a
15-year
commitment for firm transportation capacity of approximately
1.0 Bcf/d. ETP has also entered into agreements with EnCana
Marketing (USA), Inc., a subsidiary of EnCana Corporation, and
other shippers that provide for
10-year
commitments for firm transportation capacity on the Tiger
Pipeline equal to the full initial design capacity of
2.0 Bcf/d in the aggregate. In August 2009, ETP filed an
application for FERC authority to construct and operate this
pipeline. Pending necessary regulatory approvals, including
authorization from the FERC to construct the pipeline, the Tiger
Pipeline is expected to be in service in the first half of 2011.
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Midstream
Segment
ETPs midstream business owns and operates approximately
7,000 miles of in-service natural gas gathering pipelines,
three natural gas processing plants, eleven natural gas treating
facilities, and eleven natural gas conditioning facilities.
ETPs midstream segment focuses on the gathering,
compression, treating, blending, processing and marketing of
natural gas, and its operations are currently concentrated in
the Austin Chalk trend of southeast Texas, the Permian Basin of
west Texas and New Mexico, the Barnett Shale in north Texas, the
Bossier Sands in east Texas, and the Uinta and Piceance Basins
in Utah and Colorado.
The midstream segment accounted for approximately 13% of
ETPs total consolidated operating income for the nine
months ended September 30, 2009. ETPs midstream
segment results are derived primarily from margins it realizes
for natural gas volumes that are gathered, transported,
purchased and sold through its pipeline systems, processed at
its processing and treating facilities, and the volumes of NGLs
processed at its facilities. ETP also markets natural gas on its
pipeline systems in addition to other pipeline systems to
realize
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incremental revenue on gas purchased, increase pipeline
utilization and provide other services that are valued by
ETPs customers.
The following is a brief description of the various components
of ETPs midstream segment:
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The Southeast Texas System is a 5,200-mile integrated system
located in southeast Texas that gathers, compresses, treats,
processes and transports natural gas from the Austin Chalk
trend. The Southeast Texas System is a large natural gas
gathering system covering 13 counties between Austin and
Houston. The system includes the La Grange processing
plant, 11 treating facilities and four conditioning facilities.
This system is connected to the Katy Hub through the
320-mile
East Texas pipeline and is also connected to the Oasis pipeline,
as well as two power plants.
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The La Grange processing plant is a cryogenic natural gas
processing plant that processes the rich natural gas that flows
through ETPs system to produce residue gas and NGLs. The
plant has a processing capacity of approximately
240 MMcf/d.
ETPs 11 treating facilities have an aggregate capacity of
1.3 Bcf/d. These treating facilities remove carbon dioxide
and hydrogen sulfide from natural gas gathered into ETPs
system before the natural gas is introduced to transportation
pipelines to ensure that the gas meets pipeline quality
specifications. ETPs four conditioning facilities have an
aggregate capacity of
670 MMcf/d.
These conditioning facilities remove heavy hydrocarbons from the
gas gathered into ETPs systems so the gas can be
redelivered and meet downstream pipeline hydrocarbon dew point
specifications.
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The North Texas System is a
160-mile
integrated system located in four counties in North Texas that
gathers, compresses, treats, processes and transports natural
gas from the Barnett Shale trend. The system includes ETPs
Godley plant, as discussed above.
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The Godley plant processes rich natural gas produced from the
Barnett Shale and is connected with the North Texas System and
the ET Fuel System. The facility consists of a cryogenic
processing plant with processing capacity of approximately
500 MMcf/d
and a conditioning facility with approximately
100 MMcf/d
of processing capacity.
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The Canyon Gathering System consists of approximately
1,390 miles of gathering pipeline ranging in diameters from
two inches to 16 inches in the Piceance-Uinta Basin of
Colorado and Utah and six conditioning plants with an aggregated
processing capacity of
90 MMcf/d.
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The midstream segment also includes ETPs interests in
various midstream assets located in Texas, New Mexico and
Louisiana, with a combined capacity of approximately
470 MMcf/d,
as well as one processing facility.
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Marketing operations, in which ETP markets the natural gas that
flows through its assets, referred to as on-system gas, and
attracts other customers by marketing volumes of natural gas
that do not move through its assets, referred to as off-system
gas. For both on-system and off-system gas, ETP purchases
natural gas from natural gas producers and other supply points
and sells the natural gas to utilities, industrial consumers,
other marketers and pipeline companies, thereby generating gross
margins based upon the difference between the purchase and
resale prices.
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Substantially all of ETPs on-system marketing efforts
involve natural gas that flows through either the Southeast
Texas System or ETPs intrastate transportation pipelines.
For the off-system gas, ETP purchases gas or acts as an agent
for small independent producers that do not have marketing
operations. ETP develops relationships with natural gas
producers to facilitate the purchase of their production on a
long-term basis. ETP believes that this business provides ETP
with strategic insight and market intelligence, which may impact
ETPs expansion and acquisition strategy.
Retail
Propane Segment
ETP is one of the three largest retail propane marketers in the
United States, based on gallons sold. ETP serves more than one
million customers from approximately 440 customer service
locations in approximately 40 states. ETPs propane
operations extend from coast to coast with concentrations in the
western, upper
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midwestern, northeastern and southeastern regions of the United
States. ETPs propane business has grown primarily through
acquisitions of retail propane operations and, to a lesser
extent, through internal growth.
ETPs retail propane operations accounted for approximately
20% of its total consolidated operating income for the nine
months ended September 30, 2009. The retail propane segment
is a margin-based business in which gross profits depend on the
excess of sales price over propane supply cost. The market price
of propane is often subject to volatile changes as a result of
supply or other market conditions over which ETP has no control.
ETP has generally been successful in maintaining retail gross
margins on an annual basis despite changes in the wholesale cost
of propane, but there is no assurance that ETP will always be
able to pass on product cost increases fully, particularly when
product costs rise rapidly. Consequently, ETPs
profitability will be sensitive to changes in wholesale propane
prices.
ETPs propane business is largely seasonal and dependent
upon weather conditions in its service areas. Historically,
approximately two-thirds of ETPs retail propane volume and
substantially all of its propane-related operating income, is
attributable to sales during the six-month peak-heating season
of October through March. This generally results in higher
operating revenues and net income in the propane segment during
the period from October through March of each year, and lower
operating revenues and either net losses or lower net income
during the period from April through September of each year.
Cash flow from operations is generally greatest when customers
pay for propane purchased during the six-month peak-heating
season. Sales to commercial and industrial customers are much
less weather sensitive.
A substantial portion of ETPs propane is used in the
heating-sensitive residential and commercial markets causing the
temperatures in its areas of operations, particularly during the
six-month peak-heating season, to have a significant effect on
the financial performance of ETPs propane operations. In
any given area, sustained
warmer-than-normal
temperatures will tend to result in reduced propane use, while
sustained
colder-than-normal
temperatures will tend to result in greater propane use.
The retail propane segments gross profit margins are not
only affected by weather patterns, but also vary according to
customer mix. Sales to residential customers generate higher
margins than sales to certain other customer groups, such as
commercial or agricultural customers. In addition, propane gross
profit margins vary by geographical region. Accordingly, a
change in customer or geographic mix can affect propane gross
profit without necessarily affecting total revenues.
Natural
Gas Operations Segments
Industry
Overview
The midstream natural gas industry is the link between the
exploration and production of natural gas and the delivery of
its components to end-use markets. The midstream industry
consists of natural gas gathering, compression, treating,
processing and transportation and NGL fractionation and
transportation, and is generally characterized by regional
competition based on the proximity of gathering systems and
processing plants to natural gas producing wells.
Natural gas has widely varying quality and composition,
depending on the field, the formation or the reservoir from
which it is produced. The principal constituents of natural gas
are methane and ethane, though most natural gas also contains
varying amounts of heavier components, such as propane, butane
and natural gasoline that may be removed by a number of
processing methods. Most raw materials produced at the wellhead
are not suitable for long-haul pipeline transportation or
commercial use and must be compressed, transported via pipeline
to a central processing facility, and then processed to remove
the heavier hydrocarbon components and other contaminants that
would interfere with pipeline transportation or the end use of
the gas.
Demand for natural gas. Natural gas continues
to be a critical component of energy consumption in the United
States. According to data released in December 2009 by the
Energy Information Administration, or the EIA, total domestic
consumption of natural gas is expected to remain steady through
2035, with average annual consumption of 23.1 Tcf during that
period, compared to 2009 consumption of 22.6 Tcf. The industrial
and electricity generation sectors currently account for more
than half of natural gas usage in the United States.
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Natural gas gathering. The natural gas
gathering process begins with the drilling of wells into gas
bearing rock formations. Once a well has been completed, the
well is connected to a gathering system. Gathering systems
generally consist of a network of small diameter pipelines and,
if necessary, compression systems that collect natural gas from
points near producing wells and transport it to larger pipelines
for further transportation.
Natural gas compression. Gathering systems are
operated at design pressures that will maximize the total
throughput from all connected wells. Specifically, lower
pressure gathering systems allow wells, which produce at
progressively lower field pressures as they age, to remain
connected to gathering systems and to continue to produce for
longer periods of time. As the pressure of a well declines, it
becomes increasingly more difficult to deliver the remaining
production in the ground against a higher pressure that exists
in the connecting gathering system. Field compression is
typically used to lower the pressure of a gathering system. If
field compression is not installed, then the remaining
production in the ground will not be produced because it cannot
overcome the higher gathering system pressure. In contrast, if
field compression is installed, then a well can continue
delivering production that otherwise would not be produced.
Natural gas treating. Natural gas has a varied
composition depending on the field, the formation and the
reservoir from which it is produced. Natural gas from certain
formations is higher in carbon dioxide, hydrogen sulfide or
certain other contaminants. Treating plants remove carbon
dioxide and hydrogen sulfide from natural gas to ensure that it
meets pipeline quality specifications.
Natural gas processing. Some natural gas
produced by a well does not meet the pipeline quality
specifications established by downstream pipelines or is not
suitable for commercial use and must be processed to remove the
mixed NGL stream. In addition, some natural gas produced by a
well, while not required to be processed, can be processed to
take advantage of favorable processing margins. Natural gas
processing involves the separation of natural gas into pipeline
quality natural gas, or residue gas, and a mixed NGL stream.
Natural gas transportation. Natural gas
transportation pipelines receive natural gas from other mainline
transportation pipelines and gathering systems and deliver the
natural gas to industrial end-users, utilities and other
pipelines.
Competition
The business of providing natural gas gathering, transmission,
treating, transporting, storing and marketing services is highly
competitive. Since pipelines are generally the only practical
mode of transportation for natural gas over land, the most
significant competitors of ETPs transportation and storage
segment are other pipelines. Pipelines typically compete with
each other based on location, capacity, price and reliability.
ETP faces competition with respect to retaining and obtaining
significant natural gas supplies under terms favorable to it for
the gathering, treating and marketing portions of its business.
ETPs competitors include major integrated oil companies,
interstate and intrastate pipelines and companies that gather,
compress, treat, process, transport and market natural gas. Many
of ETPs competitors, such as major oil and gas and
pipeline companies, have substantially greater capital resources
and control of supplies of natural gas.
In marketing natural gas, ETP has numerous competitors,
including marketing affiliates of interstate pipelines, major
integrated oil companies, and local and national natural gas
gatherers, brokers and marketers of widely varying sizes,
financial resources and experience. Local utilities and
distributors of natural gas are, in some cases, engaged
directly, and through affiliates, in marketing activities that
compete with ETPs marketing operations.
Credit
Risk and Customers
ETP maintains credit policies with regard to its counterparties
that it believes significantly minimize overall credit risk.
These policies include an evaluation of potential
counterparties financial condition (including credit
ratings), collateral requirements under certain circumstances
and the use of standardized agreements which allow for netting
of positive and negative exposure associated with a single
counterparty.
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ETPs counterparties consist primarily of financial
institutions, major energy companies and local distribution
companies. This concentration of counterparties may impact
ETPs overall exposure to credit risk, either positively or
negatively in that the counterparties may be similarly affected
by changes in economic, regulatory or other conditions. Based on
ETPs policies, exposures, credit and other reserves,
management does not anticipate a material adverse effect on
financial position or results of operations as a result of
counterparty performance.
Current economic conditions also indicate that many of
ETPs customers may encounter increased credit risk in the
near term. In particular, ETPs natural gas transportation
and midstream revenues are derived significantly from companies
that engage in natural gas exploration and production
activities. Prices for natural gas and NGLs have fallen
dramatically since July 2008. Many of ETPs customers have
been negatively impacted by these recent declines in natural gas
prices as well as current conditions in the capital markets,
which factors have caused several of its customers to announce
plans to decrease drilling levels and, in some cases, to
consider shutting in natural gas production from some producing
wells.
ETP is diligent in attempting to ensure that it issues credit to
credit-worthy customers. However, ETPs purchase and resale
of gas exposes it to significant credit risk, as the margin on
any sale is generally a very small percentage of the total sale
price. Therefore, a credit loss could be significant to
ETPs overall profitability.
During the nine months ended September 30, 2009, none of
ETPs customers individually accounted for more than 10% of
its midstream, intrastate transportation and storage and
interstate segment revenues.
Regulation
Regulation by FERC of Interstate Natural Gas
Pipelines. FERC has broad regulatory authority
over the business and operations of interstate natural gas
pipelines. Under the NGA, FERC generally regulates the
transportation of natural gas in interstate commerce. For FERC
regulatory purposes, transportation includes natural
gas pipeline transmission (forwardhauls and backhauls), storage,
and other services. The Transwestern pipeline transports natural
gas in interstate commerce and thus qualifies as a natural
gas company under the NGA subject to FERCs
regulatory jurisdiction. ETP has applied to FERC for authority
to construct, own and operate the Tiger pipeline. ETP also holds
interests in two joint venture projects involving the
construction and operation of interstate pipelines: Midcontinent
Express pipeline, which was placed into full service in August
2009, and Fayetteville Express pipeline. Midcontinent Express
pipeline is an NGA-jurisdictional interstate transportation
system subject to the FERCs broad regulatory oversight.
Assuming FERC grants the certificates of public convenience and
necessity authorizing the construction, ownership and operation
of the Tiger and Fayetteville Express pipelines, those systems
will likewise be NGA-jurisdictional once placed into operation.
FERCs NGA authority includes the power to regulate:
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the certification and construction of new facilities;
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the review and approval of cost-based transportation rates;
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the types of services that ETPs regulated assets are
permitted to perform;
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the terms and conditions associated with these services;
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the extension or abandonment of services and facilities;
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the maintenance of accounts and records;
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the acquisition and disposition of facilities; and
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the initiation and discontinuation of services.
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Under the NGA, interstate natural gas companies must charge
rates that are just and reasonable. In addition, the NGA
prohibits natural gas companies from unduly preferring or
unreasonably discriminating against any person with respect to
pipeline rates or terms and conditions of service.
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In September 2006, Transwestern filed revised tariff sheets
under section 4 of the NGA proposing a general rate
increase to be effective on November 1, 2006. In April
2007, FERC approved a Stipulation and Agreement of Settlement,
which we refer to as the Stipulation and Agreement, that
resolved primary components of the rate case.
Transwesterns tariff rates and fuel charges are now final
for the period of the settlement. As a part of the Stipulation
and Agreement, no settling party shall seek, solicit or
financially support a change or challenge to any effective
provision of the Stipulation and Agreement during the term of
the Stipulation and Agreement. Transwestern is not required to
file a new rate case until October 1, 2011.
Rates charged on the Midcontinent Express pipeline are largely
governed by long-term negotiated rate agreements, an arrangement
approved by FERC in its July 25, 2008 order granting
Midcontinent Express pipeline the certificate of public
convenience and necessity to build, own and operate these
facilities. In the certificate order, FERC also approved
cost-based recourse rates available to prospective shippers as
an alternative to negotiated rates.
The rates to be charged by NGA-jurisdictional natural gas
companies are generally required to be on file with FERC in
FERC-approved tariffs. Most natural gas companies are authorized
to offer discounts from their FERC-approved maximum just and
reasonable rates when competition warrants such discounts.
Natural gas companies are also generally permitted to offer
negotiated rates different from rates established in their
tariff if, among other requirements, such companies
tariffs offer a cost-based recourse rate available to a
prospective shipper as an alternative to the negotiated rate.
Natural gas companies must make offers of rate discounts and
negotiated rates on a basis that is not unduly discriminatory.
Existing tariff rates may be challenged by complaint and if
found unjust and unreasonable may be altered on a prospective
basis by FERC. Rate increases proposed by the interstate natural
gas company may be challenged by protest or by FERC itself, and
if such proposed rate increases are found unjust and
unreasonable may be rejected by FERC in whole or in part. Any
successful complaint or protest against the FERC-approved rates
of ETPs interstate pipelines could have a prospective
impact on its revenues associated with providing interstate
transmission services. ETP cannot assure you that FERC will
continue to pursue its approach of pro-competitive policies as
it considers matters such as pipeline rates and rules and
policies that may affect rights of access to natural gas
transportation capacity, transportation and storage facilities.
Under the Energy Policy Act of 2005, FERC possesses regulatory
oversight over natural gas markets, including the purchase, sale
and transportation activities of non-interstate pipelines and
other natural gas market participants. Pursuant to FERCs
rules promulgated under this statutory directive, it is unlawful
for any entity, directly or indirectly, in connection with the
purchase or sale of electric energy or natural gas or the
purchase or sale of transmission or transportation services
subject to FERC jurisdiction: (1) to defraud using any
device, scheme or artifice; (2) to make any untrue
statement of material fact or omit a material fact; or
(3) to engage in any act, practice or course of business
that operates or would operate as a fraud or deceit. The
Commodity Futures Trading Commission, or the CFTC, also holds
authority to monitor certain segments of the physical and
futures energy commodities market pursuant to the Commodity
Exchange Act. With regard to ETPs physical purchases and
sales of natural gas, NGLs or other energy commodities; its
gathering or transportation of these energy commodities; and any
related hedging activities that it undertakes, ETP is required
to observe these anti-market manipulation laws and related
regulations enforced by FERC
and/or the
CFTC. These agencies hold substantial enforcement authority,
including the ability to assess civil penalties of up to
$1 million per day per violation, to order disgorgement of
profits and to recommend criminal penalties. Should ETP violate
the anti-market manipulation laws and regulations, it could also
be subject to related third-party damage claims by, among
others, sellers, royalty owners and taxing authorities.
Failure to comply with the NGA, the Energy Policy Act of 2005
and the other federal laws and regulations governing ETPs
operations and business activities can result in the imposition
of administrative, civil and criminal remedies.
Intrastate Natural Gas Regulation. Intrastate
transportation of natural gas is largely regulated by the state
in which such transportation takes place. To the extent that
ETPs intrastate natural gas transportation systems
transport natural gas in interstate commerce, the rates, terms
and conditions of such services are subject to FERC jurisdiction
under Section 311 of the NGPA. The NGPA regulates, among
other things, the
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provision of transportation services by an intrastate natural
gas pipeline on behalf of a local distribution company or an
interstate natural gas pipeline. The rates, terms and conditions
of some transportation and storage services provided on the
Oasis pipeline, HPL System, East Texas pipeline and ET Fuel
System are subject to FERC regulation pursuant to
Section 311 of the NGPA. Under Section 311, rates
charged for intrastate transportation must be fair and
equitable, and amounts collected in excess of fair and equitable
rates are subject to refund with interest. The terms and
conditions of service set forth in the intrastate
facilitys statement of operating conditions are also
subject to FERC review and approval. Should FERC determine not
to authorize rates equal to or greater than ETPs currently
approved Section 311 rates, ETPs business may be
adversely affected. Failure to observe the service limitations
applicable to transportation and storage services 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
pipelines FERC approved statement of operating conditions
could result in an alteration of jurisdictional status,
and/or the
imposition of administrative, civil and criminal remedies.
FERC has adopted new market-monitoring and annual reporting
regulations, which regulations are applicable to many intrastate
pipelines as well as other entities that are otherwise not
subject to FERCs NGA jurisdiction. These regulations are
intended to increase the transparency of wholesale energy
markets, to protect the integrity of such markets, and to
improve FERCs ability to assess market forces and detect
market manipulation. FERC has also proposed to require certain
major non-interstate pipelines to post, on a daily basis,
capacity, scheduled flow information and actual flow
information. These posting requirements are not administratively
final, thus it is not known with certainty the precise form
these requirements will ultimately take. Depending upon the
breadth of FERCs final rules, these regulations could
subject ETP to further costs and administrative burdens.
ETPs intrastate natural gas operations in Texas are also
subject to regulation by various agencies in Texas, principally
the TRRC, where they are located. ETPs intrastate pipeline
and storage operations in Texas are also subject to the Texas
Utilities Code, as implemented by the TRRC. Generally, the TRRC
is vested with authority to ensure that rates, operations and
services of gas utilities, including intrastate pipelines, are
just and reasonable and not discriminatory. The TRRC has
authority to ensure that rates charged by intrastate pipelines
for natural gas sales or transportation services are just and
reasonable. The rates ETP charges for transportation services
are deemed just and reasonable under Texas law unless challenged
in a complaint. ETP cannot predict whether such a complaint will
be filed against it or whether the TRRC will change its
regulation of these rates. Failure to comply with the Texas
Utilities Code can result in the imposition of administrative,
civil and criminal remedies.
Sales of Natural Gas and NGLs. The price at
which ETP buys and sells natural gas currently is not subject to
federal regulation and, for the most part, is not subject to
state regulation. The price at which ETP sells NGLs is not
subject to federal or state regulation. Such sales are, however,
subject to market oversight authority of FERC
and/or the
CFTC.
ETPs sales of natural gas are affected by the
availability, terms and cost of pipeline transportation. As
noted above, the price and terms of access to pipeline
transportation are subject to extensive federal and state
regulation. FERC is continually proposing and implementing new
rules and regulations affecting those segments of the natural
gas industry. These initiatives also may affect the intrastate
transportation of natural gas under certain circumstances. The
stated purpose of many of these regulatory changes is to promote
competition among the various sectors of the natural gas
industry and these initiatives generally reflect more
light-handed regulation. ETP cannot predict the ultimate impact
of these regulatory changes to its natural gas marketing
operations, and we note that some of FERCs regulatory
changes may adversely affect the availability and reliability of
interruptible transportation service on interstate pipelines.
ETP does not believe that it will be affected by any such FERC
action in a manner that is materially different from other
natural gas marketers with whom it competes.
Gathering Pipeline
Regulation. Section 1(b) of the NGA exempts
natural gas gathering facilities from the jurisdiction of FERC
under the NGA. ETP owns a number of natural gas pipelines in
Texas, Louisiana, Colorado and Utah that it believes meet the
traditional tests FERC has used to establish a pipelines
status as a
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gatherer not subject to FERC jurisdiction. However, the
distinction between FERC-regulated transmission services and
federally unregulated gathering services is the subject of
substantial, on-going litigation, so the classification and
regulation of ETPs gathering facilities could be subject
to change based on future determinations by FERC and the courts.
State regulation of gathering facilities generally includes
various safety, environmental and, in some circumstances,
nondiscriminatory take requirements and in some instances
complaint-based rate regulation.
In Texas, ETPs gathering facilities are subject to
regulation by the TRRC under the Texas Utilities Code in the
same manner as described above for its intrastate pipeline
facilities. Louisianas Pipeline Operations Section of the
Department of Natural Resources Office of Conservation is
generally responsible for regulating intrastate pipelines and
gathering facilities in Louisiana and has authority to review
and authorize natural gas transportation transactions and the
construction, acquisition, abandonment and interconnection of
physical facilities. Historically, apart from pipeline safety,
Louisiana has not acted to exercise this jurisdiction respecting
gathering facilities. In Louisiana, ETPs Chalkley System
is regulated as an intrastate transporter, and the Louisiana
Office of Conservation has determined that its Whiskey Bay
System is a gathering system.
ETP is subject to state ratable take and common purchaser
statutes in all of the states in which it operates. The 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 are designed to prohibit discrimination in favor of one
producer over another producer or one source of supply over
another source of supply. These statutes have the effect of
restricting the right of an owner of gathering facilities to
decide with whom it contracts to purchase or transport natural
gas.
Natural gas gathering may receive greater regulatory scrutiny at
both the state and federal levels. For example, the TRRC has
approved changes to its regulations governing transportation and
gathering services performed by intrastate pipelines and
gatherers, which prohibit such entities from unduly
discriminating in favor of their affiliates. Many of the
producing states have adopted some form of complaint-based
regulation that generally allows natural gas producers and
shippers to file complaints with state regulators in an effort
to resolve grievances relating to natural gas gathering access
and rate discrimination allegations. ETPs gathering
operations could be adversely affected should they be subject in
the future to the application of additional or different state
or federal regulation of rates and services. ETPs
gathering operations also may be or become subject to safety and
operational regulations relating to the design, installation,
testing, construction, operation, replacement and management of
gathering facilities. Additional rules and legislation
pertaining to these matters are considered or adopted from time
to time. ETP cannot predict what effect, if any, such changes
might have on its operations, but the industry could be required
to incur additional capital expenditures and increased costs
depending on future legislative and regulatory changes.
Pipeline Safety. The states in which ETP
conducts operations administer federal pipeline safety standards
under the Natural Gas Pipeline Safety Act of 1968, as amended,
or the NGPSA, which requires certain pipelines to comply with
safety standards in constructing and operating the pipelines and
subjects the pipelines to regular inspections. Failure to comply
with the NGPSA may result in the imposition of administrative,
civil and criminal remedies. The rural gathering
exemption under the NGPSA presently exempts substantial
portions of ETPs gathering facilities from jurisdiction
under that statute. The portions of ETPs facilities that
are exempt include those portions located outside of cities,
towns or any area designated as residential or commercial, such
as a subdivision or shopping center. The rural gathering
exemption, however, may be restricted in the future, and
it does not apply to ETPs intrastate natural gas pipelines.
Retail
Propane Segment
Industry
Overview
Propane, a by-product of natural gas processing and petroleum
refining, is a clean-burning energy source recognized for its
transportability and ease of use relative to alternative forms
of stand-alone energy sources. Retail propane use falls into
three broad categories: (1) residential applications,
(2) industrial, commercial and
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agricultural applications and (3) other retail
applications, including motor fuel sales. In its wholesale
operations, ETP sells propane principally to governmental
agencies and industrial end-users.
Propane is extracted from natural gas at processing plants or
separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate
pressure or refrigeration for ease of handling in shipping and
distribution. When the pressure is released or the temperature
is increased, it is usable as a flammable gas. Propane is
naturally colorless and odorless. An odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel
and is considered an environmentally preferred energy source.
Competition
Propane competes with other sources of energy, some of which are
less costly for equivalent energy value. ETP competes for
customers against suppliers of electricity, natural gas and fuel
oil. Competition from alternative energy sources has been
increasing as a result of reduced utility regulation. Except for
certain industrial and commercial applications, propane is
generally not competitive with natural gas in areas where
natural gas pipelines already exist because natural gas is a
significantly less expensive source of energy than propane. The
gradual expansion of natural gas distribution systems in the
United States has resulted in the availability of natural gas in
many areas that previously depended upon propane. Although the
extension of natural gas pipelines tends to displace propane
distribution in areas affected, ETP believes that new
opportunities for propane sales arise as more geographically
remote neighborhoods are developed. Even though propane is
similar to fuel oil in certain applications and market demand,
propane and fuel oil compete to a lesser extent primarily
because of the cost of converting from one to another. According
to industry publications, propane accounts for 6.5% of household
energy consumption in the United States.
In addition to competing with alternative energy sources, ETP
competes with other companies engaged in the retail propane
distribution business. Competition in the propane industry is
highly fragmented and generally occurs on a local basis with
other large multi-state propane marketers, thousands of smaller
local independent marketers and farm cooperatives. Most of
ETPs customer service locations compete with five or more
marketers or distributors in their area of operations. Each
retail distribution outlet operates in its own competitive
environment because retail marketers tend to locate in close
proximity to customers. The typical retail distribution outlet
generally has an effective marketing radius of approximately
50 miles, although in certain rural areas the marketing
radius may be extended by satellite locations.
The ability to compete effectively further depends on the
reliability of service, responsiveness to customers and the
ability to maintain competitive prices. ETP believes that its
safety programs, policies and procedures are more comprehensive
than many of its smaller, independent competitors and give it a
competitive advantage over such retailers.
Products,
Services and Marketing
ETP distributes propane through a nationwide retail distribution
network consisting of approximately 440 customer service
locations in approximately 40 states, concentrated in large
part in the western, upper midwestern, northeastern and
southeastern regions of the United States.
Typically, customer service locations are found in suburban and
rural areas where natural gas is not readily available. Such
locations generally consist of a one to two acre parcel of land,
an office, a small warehouse and service facility, a dispenser
and one or more 18,000 to 30,000 gallon storage tanks. Propane
is generally transported from refineries, pipeline terminals,
leased storage facilities and coastal terminals by rail or truck
transports to ETPs customer service locations where it is
unloaded into storage tanks. In order to make a retail delivery
of propane to a customer, a bobtail truck, which generally holds
2,500 to 3,000 gallons of propane, is loaded with propane from
the storage tank. Propane is then delivered to the customer by
the bobtail truck and pumped into a stationary storage tank on
the customers premises. ETP also delivers propane to
retail customers in portable cylinders. ETP also delivers
propane to certain other bulk end-users of propane in
tractor-trailer transports, which typically have an average
capacity of approximately 10,500 gallons. End-
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users receiving transport deliveries include industrial
customers, large-scale heating accounts, mining operations and
large agricultural accounts.
ETP encourages its customers whose propane needs are temperature
sensitive to implement a regular delivery schedule. Many of
ETPs residential customers receive their propane supply
pursuant to an automatic delivery system, which eliminates the
customers need to make an affirmative purchase decision
and allows for more efficient route scheduling. ETP also sells,
installs and services equipment related to its propane
distribution business, including heating and cooking appliances.
Of the retail gallons ETP sold for the nine months ended
September 30, 2009, approximately 55% were to residential
customers, 30% were to industrial, commercial and agricultural
customers, and 15% were to other retail users. Sales to
residential customers for the nine months ended
September 30, 2009 accounted for approximately 55% of total
retail gallons sold but accounted for approximately 66% of
ETPs gross profit from propane sales. Residential sales
have a greater profit margin and a more stable customer base
than the other markets ETP serves. Industrial, commercial and
agricultural sales accounted for approximately 22% of ETPs
gross profit from propane sales for the nine months ended
September 30, 2009, with all other retail users accounting
for approximately 12%. No single customer accounts for 10% or
more of consolidated revenues for the nine months ended
September 30, 2009.
Since home heating usage is the most sensitive to temperature,
residential customers account for the greatest usage variation
due to weather. Variations in the weather in one or more regions
in which ETP operates can significantly affect the total volumes
of propane that ETP sells and the margins realized thereon and,
consequently, its results of operations. ETP believes that sales
to the commercial and industrial markets, while affected by
economic patterns, are not as sensitive to variations in weather
conditions as sales to residential and agricultural markets.
Propane
Supply and Storage
ETPs supplies of propane historically have been readily
available from its supply sources. ETP purchases from over 40
energy companies and natural gas processors at numerous supply
points located in the United States and Canada. For the nine
months ended September 30, 2009, Enterprise Products
Operating L.P., or Enterprise, and Targa Liquids, or Targa,
provided approximately 49.3%, and 14.9% of ETPs combined
total propane supply, respectively. Enterprise is a subsidiary
of Enterprise GP Holdings, L.P., or Enterprise GP, an entity
that owns approximately 17.6% of our outstanding common units
and a 40.6% non-controlling equity interest in LE GP, LLC. Titan
purchases the majority of its propane from Enterprise pursuant
to an agreement that expires in 2010. Additionally, HOLP has a
monthly storage contract with TEPPCO Partners, L.P. (a wholly
owned subsidiary of Enterprise).
In addition, ETP has a propane purchase agreement with M.P.
Oils, Ltd. that expires in 2015, which provided 14.7% of
ETPs combined total propane supply during the nine months
ended September 30, 2009.
ETP believes that if supplies from Enterprise, Targa or M.P.
Oils, Ltd. were interrupted, it would be able to secure adequate
propane supplies from other sources without a material
disruption of its operations. No other single supplier provided
more than 10% of ETPs total domestic propane supply during
the year ended December 31, 2008. Although ETP cannot
assure you that supplies of propane will be readily available in
the future, it believes that its diversification of suppliers
will enable it to purchase all of its supply needs at market
prices without a material disruption of operations if supplies
are interrupted from any of its existing sources. However,
increased demand for propane in periods of severe cold weather,
or otherwise, could cause future propane supply interruptions or
significant volatility in the price of propane.
Except for ETPs supply agreement and the agreement with
M.P. Oils, Ltd., ETP typically enters into one-year supply
agreements. The percentage of contract purchases may vary from
year to year. Supply contracts generally provide for pricing in
accordance with posted prices at the time of delivery or at the
current prices established at major delivery or storage points,
and some contracts include a pricing formula that typically is
based on these market prices. ETP generally has attempted to
reduce price risk by purchasing propane on a short-term basis.
ETP has on occasion purchased for future resale significant
volumes of propane
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for storage during periods of low demand, which generally occur
during the summer months, at the then current market price, both
at its customer service locations and in major storage
facilities. ETP receives its supply of propane predominately
through railroad tank cars and common carrier transport.
ETP leases space in larger storage facilities in Michigan,
Arizona, New Mexico, and Texas, and smaller storage facilities
in other locations, and has the opportunity to use storage
facilities in additional locations when it pre-buys
product from sources having such facilities. ETP believes that
it has adequate third-party storage to take advantage of supply
purchasing advantages as they may occur from time to time.
Access to storage facilities allows ETP to buy and store large
quantities of propane during periods of low demand, which
generally occur during the summer months, or at favorable
prices, thereby helping to ensure a more secure supply of
propane during periods of intense demand or price instability.
Pricing
Policy
Pricing policy is an essential element in the marketing of
propane. ETP relies on regional management to set prices based
on prevailing market conditions and product cost, as well as
local management input. All regional managers are advised
regularly of any changes in the posted price of each customer
service locations propane suppliers. In most situations,
ETP believes that its pricing methods will permit it to respond
to changes in supply costs in a manner that protects its gross
margins and customer base, to the extent such protection is
possible. In some cases, however, ETPs ability to respond
quickly to cost increases could occasionally cause its retail
prices to rise more rapidly than those of its competitors,
possibly resulting in a loss of customers.
Environmental
Matters
The operation of pipelines, plants and other facilities for
gathering, compressing, treating, processing, or transporting
natural gas, natural gas liquids and other products is subject
to stringent and complex federal, state, and local laws and
regulations governing the discharge of materials into the
environment or otherwise relating to the protection of the
environment. These laws and regulations can impair ETPs
business activities that affect the environment in many ways,
such as:
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restricting how ETP can release materials or waste products into
the air, water, or soils;
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limiting or prohibiting construction activities in sensitive
areas such as wetlands or areas of endangered species habitat,
or otherwise constraining how or when construction is conducted;
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requiring remedial action to mitigate pollution from former
operations, or requiring plans and activities to prevent
pollution from ongoing operations; and
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imposing substantial liabilities on ETP for pollution resulting
from its operations, including, for example, potentially
enjoining the operations of facilities if it were determined
that they were not in compliance with permit terms.
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Planning, designing, constructing and operating pipelines,
plants and other facilities must incorporate compliance with
environmental laws and regulations and safety standards. Failure
to comply with these laws and regulations may result in the
assessment of administrative, civil and criminal penalties, the
imposition of remedial obligations, the issuance of injunctions
and the filing of federally authorized citizen suits. ETP has
implemented environmental programs and policies designed to
reduce potential liability and costs under applicable
environmental laws and regulations.
The clear trend in environmental regulation is to place more
restrictions and limitations on activities that may affect the
environment. Changes in environmental laws and regulations that
result in more stringent waste handling, storage, transport,
disposal, or remediation requirements will increase ETPs
cost for performing those activities, and if those increases are
sufficiently large, they could have a material adverse effect on
its operations and financial position. Moreover, risks of
process upsets, accidental releases or spills are associated
with ETPs operations, and ETP cannot assure you that it
will not incur significant costs and liabilities if such upsets,
releases, or spills were to occur. In the event of future
increases in costs, ETP may be unable to pass
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on those increases to its customers. While ETP believes it is in
substantial compliance with existing environmental laws and
regulations and that continued compliance with current
requirements would not have a material adverse effect, there is
no assurance that this trend will continue in the future.
The Comprehensive Environmental Response, Compensation and
Liability Act, as amended, also known as CERCLA or
Superfund, and comparable state laws, impose
liability without regard to fault or the legality of the
original conduct on certain classes of persons who are
considered to be responsible for the release of a hazardous
substance into the environment. One class of responsible
persons is the current owners or operators of contaminated
property, even if the contamination arose as a result of
historical operations conducted by previous, unaffiliated
occupants of the property. Under CERCLA, responsible
persons may be subject to joint and several strict
liability for the costs of cleaning up the hazardous substances
that have been released into the environment, for damages to
natural resources, and for the costs of certain health studies.
It also is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property
damage allegedly caused by the release of hazardous substances
into the environment. Although petroleum is excluded
from the definition of hazardous substance under CERCLA, ETP
will generate materials in the course of its operations that may
be considered hazardous substances under CERCLA. ETP also may
incur liability under the Resource Conservation and Recovery
Act, also known as RCRA, which imposes requirements related to
the management and disposal of solid and hazardous wastes. While
there exists an exclusion from the definition of hazardous
wastes for drilling fluids, produced waters, and other
wastes associated with the exploration, development, or
production of crude oil, natural gas or geothermal energy,
in the course of ETPs operations, ETP may generate certain
types of non-excluded petroleum product wastes as well as
ordinary industrial wastes such as paint wastes, waste solvents,
and waste compressor oils that may be regulated as hazardous or
solid wastes.
ETP currently owns or leases, and has in the past owned or
leased, numerous properties that for many years have been used
for the measurement, gathering, field compression and processing
of natural gas and NGLs. Although ETP used operating and
disposal practices that were standard in the industry at the
time, petroleum hydrocarbons or wastes may have been disposed of
or released on or under the properties owned or leased by ETP,
or on or under other locations where such wastes were taken for
disposal. In addition, some of these properties have been
operated by third parties whose treatment and disposal or
release of petroleum hydrocarbons and wastes was not under
ETPs control. These properties and the materials disposed
or released on them may be subject to CERCLA, RCRA and analogous
state laws. Under such laws, ETP could be required to remove or
remediate previously disposed wastes or property contamination,
or to perform remedial activities to prevent future
contamination. A predecessor company acquired by ETP in July
2001 had previously received and responded to a request for
information from the EPA regarding its potential contribution to
widespread groundwater contamination in San Bernardino,
California, known as the Newmark Groundwater Contamination
Superfund site. ETP has not received any
follow-up
correspondence from EPA on the matter since its acquisition of
the predecessor company in 2001. In addition, through ETPs
acquisitions of ongoing businesses, ETP is currently involved in
several remediation projects that have cleanup costs and related
liabilities. As of December 31, 2008, an accrual of $13.3
million was recorded in our consolidated balance sheet as
accrued and other current liabilities and other non-current
liabilities to cover estimated material environmental
liabilities including certain matters assumed in connection with
ETPs acquisition of the HPL System, the Transwestern
acquisition, potential environmental liabilities for three sites
that were formerly owned by Titan or its predecessors and the
predecessor owners share of certain environmental
liabilities of ETC OLP.
Transwestern conducts soil and groundwater remediation at a
number of its facilities. Some of the clean up activities
include remediation of several compressor sites on the
Transwestern system for contamination by polychlorinated
biphenyls, or PCBs, and the costs of this work are not eligible
for recovery in rates. The total accrued future estimated cost
of remediation activities expected to continue through 2018 is
approximately $8.7 million. Transwestern received FERC
approval for rate recovery of projected soil and groundwater
remediation costs not related to PCBs effective April 1,
2007.
Transwestern continues to incur certain costs related to PCBs
that could migrate through its pipelines into customers
facilities. Transwestern, as part of ongoing arrangements with
customers, continues to incur costs
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associated with containing and removing the PCBs. Costs of these
remedial activities were minimal for the nine months ended
September 30, 2009. Future costs cannot be reasonably
estimated because remediation activities are undertaken as
potential claims are made by customers and former customers, and
accordingly, no accrual has been established for these costs at
September 30, 2009. However, such future costs are not
expected to have a material impact on ETPs financial
position, results of operations or cash flows.
The Federal Water Pollution Control Act of 1972, as amended,
also known as the Clean Water Act, and analogous state laws
impose restrictions and strict controls regarding the discharge
of pollutants into state and federal waters. The discharge of
pollutants into regulated waters is prohibited, except in accord
with the terms of a permit issued by the EPA or the applicable
state. Any unpermitted release of pollutants, including NGLs or
condensates, from ETPs systems or facilities could result
in fines or penalties, as well as significant remedial
obligations. ETP believes that it is in substantial compliance
with the Clean Water Act. In addition, the EPAs Spill
Prevention, Control and Countermeasures, or SPCC, program was
recently modified to require more stringent tank integrity
testing and additional containment, among other things. ETP is
currently reviewing the impact to its operations and expects to
expend resources on tank integrity testing and any associated
corrective actions as well as potential upgrades to containment
structures. Costs associated with tank integrity testing and
resulting corrective actions cannot be reasonably estimated at
this time, but ETP believes such costs will not have a material
adverse effect on its financial position, results of operations
or cash flows.
The Federal Clean Air Act, as amended, and comparable state laws
restrict the emission of air pollutants from many sources,
including processing plants and compressor stations. These laws
and any implementing regulations may require us to obtain
pre-approval for the construction or modification of certain
projects or facilities expected to produce air emissions,
satisfy stringent air permit requirements, or utilize specific
equipment or technologies to control emissions. Failure to
comply with these laws and regulations could expose ETP to civil
and criminal enforcement actions. ETP received a state-issued
Pipeline Facilities air emissions permit on
June 30, 2005 for its Prairie Lea Compressor Station in
Caldwell County, Texas, which historically has been designated
as a grandfathered facility and, thus, was excluded
from state air emissions permitting requirements. ETP currently
complies with the terms of this permit and associated
regulations requiring specified reductions in nitrogen oxides or
NOx emissions. During 2006 and 2007 ETP spent an
estimated $3.0 million to modify the compressor engines at
the facility. In addition, ETP has established agency-approved
baseline monitoring of NOx emissions from its Katy Compressor
Station in Harris County, Texas, which is in a non-attainment
area for ozone. The NOx baseline has been established and ETP
has a sufficient amount of NOx emission allowances to allow the
facility to continue at its current level of operation in the
non-attainment area. These plans are subject to possible change
however, because the Texas Commission on Environmental Quality
is currently developing a plan to respond to the re-designation
of the Houston area from a moderate to a severe ozone
non-attainment area, and later it will develop another plan to
address the recent change in the ozone standard from
0.08 ppm to 0.075 ppm. ETP expects these efforts will
result in the adoption of new regulations that may require
additional NOx emissions reductions.
In response to scientific studies suggesting that emissions of
certain gases, commonly referred to as greenhouse
gases and including carbon dioxide and methane, may be
contributing to the warming of the Earths atmosphere and
other changes to the global climate, on June 26, 2009, the
U.S. House of Representatives passed the American
Clean Energy and Security Act of 2009, or ACESA. ACESA
would establish an economy-wide cap- and-trade
program to reduce domestic emissions of greenhouse gases by 17%
from 2005 levels by 2020 and just over 80% by 2050. Under this
legislation, EPA would issue a capped and steadily declining
number of tradable emissions allowances to major sources of
greenhouse gas emissions, including producers of NGLs (that is,
gas processing plants), local natural gas distribution companies
and certain industrial facilities, so that such sources could
continue to emit greenhouse gases into the atmosphere. The cost
of these allowances would be expected to escalate significantly
over time. The U.S. Senate has begun work on its own
legislation for restricting domestic greenhouse gas emissions,
and the Senate bill contains many of the same elements as ACESA.
Although it is not possible at this time to predict when the
Senate might pass its own climate change legislation or how any
bill passed by the Senate would ultimately be reconciled with
ACESA, any future federal laws or implementing regulations that
may be adopted to address
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greenhouse gas emissions could require ETP to incur increased
operating costs and could adversely affect demand for the
natural gas and NGL products and services ETP provides.
In addition, more than one-third of the states, either
individually or through multi-state regional initiatives,
already have begun implementing legal measures to reduce
emissions of greenhouse gases, primarily through regional
greenhouse gas cap and trade programs. These cap and trade
programs require major sources of emissions, such as electric
power plants, or major producers of fuels, such as refineries or
gas processing plants, to hold emission allowances for the
amounts of greenhouse gases that they emit or would be produced
as a result of the combustion of the fuels they produce.
Regulated entities with insufficient allowances are required to
acquire enough emission allowances from other allowances to make
up for any deficits. While the details of many of these regional
programs are still being worked out and while any federal
legislation that is passed would be expected to preempt the
state or regional greenhouse gas regulatory programs to some
extent, ETP could be required to purchase allowances under these
regional programs, either for greenhouse gas emissions resulting
from ETPs operations (e.g., compressor stations) or from
the combustion of fuels (e.g., natural gas) that ETP
processes.
Also, as a result of the United States Supreme Courts
decision on April 2, 2007 in Massachusetts,
et al. v. EPA, the EPA was required to
determine whether greenhouse gas emissions from mobile sources
such as cars and trucks posed an endangerment to human health
and the environment. On December 7, 2009, the EPA announced
its findings that emissions of carbon dioxide, methane and other
greenhouse gases present an endangerment to human
health and the environment because emissions of such gases are,
according to the EPA, contributing to warming of the
earths atmosphere and other climatic changes. These
findings by the EPA allow the agency to proceed with the
adoption and implementation of regulations that would restrict
emissions of greenhouse gases under existing provisions of the
federal Clean Air Act. In late September 2009, the EPA proposed
two sets of regulations in anticipation of finalizing its
endangerment finding: one to reduce emissions of greenhouse
gases from motor vehicles and the other to control emissions of
greenhouse gases from stationary sources. Although the motor
vehicle rules are expected to be adopted in March 2010, it may
take the EPA several years to impose regulations limiting
emissions of greenhouse gases from stationary sources. In
addition, on September 22, 2009, the EPA issued a final
rule requiring the reporting by March 2011 of calendar year 2010
greenhouse gas emissions from specified large greenhouse gas
emission sources in the United States, including natural gas
liquids fractionators and local natural gas distribution
companies. As with the regional greenhouse gas regulatory
programs, any federal greenhouse gas legislation is expected to
prevent the EPA from regulating greenhouse gases under existing
Clean Air Act regulatory programs to some extent, but if
Congress fails to pass greenhouse gas legislation, the EPA is
expected to continue its announced regulatory actions. Any
limitation on emissions of greenhouse gases from ETPs
equipment and operations could require ETP to incur significant
costs to reduce emissions of greenhouse gases associated with
ETPs operations or acquire allowances at the prevailing
rates in the marketplace.
ETPs pipeline operations are subject to regulation by the
U.S. Department of Transportation, or DOT, under the
Pipeline Hazardous Materials Safety Administration, or PHMSA,
pursuant to which the PHMSA has established requirements
relating to the design, installation, testing, construction,
operation, replacement and management of pipeline facilities.
Moreover, the PHMSA, through the Office of Pipeline Safety, has
promulgated a rule, known as the IMP Rule, requiring pipeline
operators to develop integrity management programs to
comprehensively evaluate their pipelines, and take measures to
protect pipeline segments located in what the rule refers to as
high consequence areas. Activities under these
integrity management programs involve the performance of
internal pipeline inspections, pressure testing, or other
effective means to assess the integrity of these regulated
pipeline segments, and the regulations require prompt action to
address integrity issues raised by the assessment and analysis.
Through September 30, 2009, a total of $47.9 million
of capital costs and $25.7 million of operating and
maintenance costs have been incurred for pipeline integrity
testing, including $24.6 million of capital costs and
$12.6 million of operating and maintenance costs during the
first nine months of 2009. Integrity testing and assessment of
all of these assets will continue, and the potential exists that
results of such testing and assessment could cause ETP to incur
even greater capital and operating expenditures for repairs or
upgrades deemed necessary to ensure the continued safe and
reliable operation of its pipelines.
S-103
ETP is subject to the requirements of the federal Occupational
Safety and Health Act, also known as OSHA, and comparable state
laws that regulate the protection of the health and safety of
employees. In addition, OSHAs hazardous communication
standard requires that information be maintained about hazardous
materials used or produced in ETPs operations and that
this information be provided to employees, state and local
government authorities and citizens. ETP believes that its
operations are in substantial compliance with the OSHA
requirements, including general industry standards, record
keeping requirements, and monitoring of occupational exposure to
regulated substances.
National Fire Protection Association Pamphlets No. 54 and
No. 58, which establish rules and procedures governing the
safe handling of propane, or comparable regulations, have been
adopted as the industry standard in all of the states in which
ETP operates. In some states these rules and standards are
administered by state agencies, and in others they are
administered on a municipal level. With respect to the
transportation of propane by truck, ETP is subject to
regulations governing the transportation of hazardous materials
under the Federal Motor Carrier Safety Act, administered by the
DOT. ETP conducts ongoing training programs to help ensure that
its operations are in compliance with applicable regulations.
ETP believes that the procedures currently in effect at all of
our facilities for the handling, storage, and distribution of
propane are consistent with industry standards and are in
substantial compliance with applicable laws and regulations.
Employees
As of December 31, 2009, ETP employed 1,282 people to
operate its natural gas operation segments. ETP employs
4,245 full-time employees to operate its propane segments.
Of the propane employees, 61 are represented by labor unions.
ETP believes that its relations with its employees are
satisfactory. Historically, ETPs propane operations hire
seasonal workers to meet peak winter demands.
S-104
MANAGEMENT
Directors
and Executive Officers of the General Partner
The following table sets forth certain information with respect
to the executive officers and members of the Board of Directors
of our general partner as of the date of this prospectus
supplement. All of the current directors of LE GP, our general
partner, with the exception of Mr. Duncan and
Dr. Cunningham, are also directors of the general partner
of ETP. Executive officers and directors are elected for
indefinite terms.
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|
|
|
|
|
|
Name
|
|
Age
|
|
Position with Our General Partner
|
|
John W. McReynolds
|
|
|
58
|
|
|
Director, President and Chief Financial Officer
|
Sonia W. Aubé
|
|
|
45
|
|
|
Vice-President of Administration and Secretary
|
Kelcy L. Warren
|
|
|
54
|
|
|
Director and Chairman of the Board
|
Ray C. Davis
|
|
|
67
|
|
|
Director
|
Marshall S. McCrea, III
|
|
|
50
|
|
|
Director
|
David R. Albin
|
|
|
50
|
|
|
Director
|
K. Rick Turner
|
|
|
51
|
|
|
Director
|
Bill W. Byrne
|
|
|
80
|
|
|
Director
|
Paul E. Glaske
|
|
|
76
|
|
|
Director
|
John D. Harkey, Jr.
|
|
|
49
|
|
|
Director
|
Dan L. Duncan
|
|
|
76
|
|
|
Director
|
Dr. Ralph S. Cunningham
|
|
|
69
|
|
|
Director
|
Set forth below is biographical information regarding the
foregoing officers and directors of our general partner:
John W. McReynolds. Mr. McReynolds has
served as our President since March 2005 and served as a
Director and Chief Financial Officer since August 2005. He is
also a director of ETP. Prior to becoming President of ETE,
Mr. McReynolds was a partner with the international law
firm of Hunton & Williams LLP, for over 20 years.
As a lawyer, Mr. McReynolds specialized in energy-related
finance, securities, partnerships, mergers and acquisitions,
syndication and litigation matters, and served as an expert in
numerous arbitration, litigation and governmental proceedings.
Sonia W. Aubé. Mrs. Aubé was
appointed as our Vice-President of Administration and Secretary
on January 23, 2009. Mrs. Aubé has served as our
Secretary since October 12, 2005. Prior to joining ETE,
Mrs. Aubé served as the Director of Business
Development of the Dallas office of Hunton & Williams
LLP, a national law firm.
Kelcy L. Warren. Mr. Warren was appointed
Co-Chairman of the Board of Directors of our general partner, LE
GP, LLC, effective upon the closing of our IPO. On
August 15, 2007, Mr. Warren became the sole Chairman
of the Board of our general partner and the Chief Executive
Officer and Chairman of the Board of the general partner of ETP.
Prior to that, Mr. Warren had served as Co-Chief Executive
Officer and Co-Chairman of the Board of the general partner of
ETP since the combination of the midstream and intrastate
transportation storage operations of ETC OLP and the retail
propane operations of Heritage in January 2004. Mr. Warren
also serves as Chief Executive Officer of the general partner of
ETC OLP. Prior to the combination of the operations of ETP and
Heritage Propane, Mr. Warren served as President of the
general partner of ET Company I, Ltd., the entity that
operated ETPs midstream assets before it acquired Aquila,
Inc.s midstream assets, having served in that capacity
since 1996. From 1996 to 2000, he served as a Director of
Crosstex Energy, Inc. From 1993 to 1996, he served as President,
Chief Operating Officer and a Director of Cornerstone Natural
Gas, Inc. Mr. Warren has more than 25 years of
business experience in the energy industry.
Ray C. Davis. Mr. Davis served as
Co-Chairman of the Board of Directors of our general partner, LE
GP, LLC, effective upon the closing of our IPO until his
retirement effective August 15, 2007. Mr. Davis also
served as Co-Chief Executive Officer and Co-Chairman of the
Board of Directors of the general partner of ETP since the
combination of the midstream and transportation operations of
ETC OLP and the retail propane
S-105
operations of Heritage in January 2004 until his retirement from
these positions effective August 15, 2007. Mr. Davis
also served as Co-Chief Executive Officer of the general partner
of ETC OLP, and as Co-Chief Executive Officer of ETP and
Co-Chairman of the Board of the general partner of ETE,
positions he held since their formation in 2002. Mr. Davis
now serves as a director of the general partners of ETP and ETE.
Prior to the combination of the operations of ETP and Heritage
Propane, Mr. Davis served as Vice President of the general
partner of ET Company I, Ltd., the entity that operated ETC
OLPs midstream assets before it acquired Aquila,
Inc.s midstream assets, having served in that capacity
since 1996. From 1996 to 2000, he served as a Director of
Crosstex Energy, Inc. From 1993 to 1996, he served as Chairman
of the Board of Directors and Chief Executive Officer of
Cornerstone Natural Gas, Inc. Mr. Davis has more than
32 years of business experience in the energy industry.
Mr. Davis became a venture partner of Natural Gas Partners,
L.L.C. in September 2007.
Marshall S. McCrea. Mr. McCrea has served
as the President and Chief Operating Officer of ETP GP since
June 2008. Prior to that, he served as President
Midstream from March 2007 to June 2008. Previously, since the
combination of ETPs midstream and propane operations in
January 2004, Mr. McCrea served as the Senior Vice
President Commercial Development over the midstream
operations. Before January 2004, Mr. McCrea served as
Senior Vice President Business Development and
Producer Services of ETPs midstream operations, having
served in that capacity since 1997. Mr. McCrea has served
as a Director of our general partner and of ETP GP since
December 2009.
David R. Albin. Mr. Albin is a managing
partner of the Natural Gas Partners private equity funds, and
has served in that capacity or similar capacities since 1988.
Prior to his participation as a founding member of Natural Gas
Partners, L.P. in 1988, he was a partner in the
$600 million Bass Investment Limited Partnership. Prior to
joining Bass Investment Limited Partnership, he was a member of
the oil and gas group in the investment banking division of
Goldman, Sachs & Co. He currently serves as a director
of NGP Capital Resources Company. Mr. Albin has served as a
director of ETP GP since February 2004 and has served as a
Director of our general partner since October 2002.
K. Rick Turner. Mr. Turner has been
employed by Stephens family entities since 1983. He is
currently Senior Managing Principal of The Stephens Group, LLC.
He first became a private equity principal in 1990 after serving
as the Assistant to the Chairman, Jackson T. Stephens. His areas
of focus have been oil and gas exploration, natural gas
gathering, processing industries, and power technology.
Mr. Turner currently serves as a director of Atlantic Oil
Corporation; SmartSignal Corporation; JV Industrials, LLC, JEBCO
Seismic, LLC; North American Energy Partners Inc., Seminole
Energy Services, LLC, BTEC Turbines LP, and the general partner
of ETP and our general partner. Prior to joining Stephens, he
was employed by Peat, Marwick, Mitchell and Company.
Mr. Turner earned his B.S.B.A. from the University of
Arkansas and is a non-practicing Certified Public Accountant.
Mr. Turner has served as a director of our general partner
since October 2002.
Bill W. Byrne. Mr. Byrne is the principal
of Byrne & Associates, LLC, an investment company
based in Tulsa, Oklahoma. Prior to his retirement in 1992,
Mr. Byrne was Vice President of Warren Petroleum Company,
the gas liquids division of Chevron Corporation, serving in that
capacity from 1982 to 1992. Mr. Byrne has served as a
director of ETPs general partner since 1992 and is a
member of both the Audit Committee and the Compensation
Committee of ETPs general partner. Mr. Byrne is a
former president and director of the National Propane Gas
Association, or NPGA. Mr. Byrne has served as a Director of
our general partner since May 2006.
Paul E. Glaske. Mr. Glaske retired as
Chairman and Chief Executive Officer of Blue Bird Corporation,
the largest manufacturer of school buses with manufacturing
plants in three countries. Prior to becoming president of Blue
Bird in 1986, Mr. Glaske served as the president of the
Marathon LeTourneau Company, a manufacturer of large off-road
mining and material handling equipment and off-shore drilling
rigs. He served as a member of the board of directors of
BorgWarner, Inc. of Chicago, Illinois until April 2008. In
addition, Mr. Glaske serves on the board of directors of
both Lincoln Educational Services in New Jersey, and Camcraft,
Inc., in Illinois. Mr. Glaske has served as a director of
ETPs general partner since February 2004 and is
S-106
chairman of ETPs Audit Committee. Mr. Glaske has
served as a Director of our general partner since May 2006.
John D. Harkey, Jr. Mr. Harkey has
served as Chief Executive Officer and Chairman of Consolidated
Restaurant Companies, Inc., since 1998. Mr. Harkey
currently serves on the Board of Directors and Audit Committee
of Leap Wireless International, Inc., Loral Space &
Communications, Inc., Emisphere Technologies, Inc., and the
Board of Directors for the Baylor Health Care System Foundation.
He also serves on the Presidents Development Council of
Howard Payne University, Baylor Health Care Foundation and on
the Executive Board of Circle Ten Council of the Boy Scouts of
America. Mr. Harkey has served as a Director of our general
partner since December 2005. In May 2006, Mr. Harkey was
elected as a Director of our general partner and member of the
Audit Committee.
Dan L. Duncan. Mr. Duncan has served as
Chairman and Director of Enterprise Products GP, LLC, the
general partner of Enterprise, since April 1998 and has served
as Chairman and Director of EPE Holdings, LLC, the general
partner of Enterprise GP, since August 2005. Mr. Duncan has
also served as Chairman and Director of DEP Holdings, LLC, the
general partner of Duncan Energy Partners L.P., a publicly
traded energy services partnership affiliated with Enterprise
and Enterprise GP. Mr. Duncan also serves as an Honorary
Trustee of the Board of Trustees of the Texas Heart Institute at
St. Lukes Episcopal Hospital. Mr. Duncan has served
as a Director of our general partner since December 2009.
Dr. Ralph S.
Cunningham. Dr. Cunningham has served as
President and Chief Executive Officer of EPE Holdings, LLC since
August 2007. He also served as Group Executive Vice President
and Chief Operating Officer of Enterprise Products GP, LLC from
December 2005 to August 2007 and Interim President and Interim
Chief Executive Officer from June 2007 to August 2007.
Dr. Cunningham retired in 1997 from CITGO Petroleum
Corporation, where he had served as President and Chief
Executive Officer since 1995. He currently serves as a Director
of Enterprise Products GP, LLC, Tetra Technologies, Inc., EnCana
Corporation and Agrium, Inc. Dr. Cunningham has served as a
Director of our general partner since December 2009.
S-107
RELATED
PARTY TRANSACTIONS
Our cash flows currently consist of distributions from ETP
related to the following equity interests, including incentive
distribution rights in ETP:
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|
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|
|
an approximate 1.8% general partner interest, which ETE holds
indirectly through its ownership interests in ETP GP;
|
|
|
|
100% of the outstanding incentive distribution rights in ETP,
which ETE holds indirectly through its ownership interests in
ETP GP; and
|
|
|
|
approximately 62.5 million ETP common units, all of which
are held directly by ETE.
|
ETP is required by its partnership agreement to distribute all
cash on hand at the end of each quarter, less appropriate
reserves determined by the board of directors of its general
partner. Based on ETPs quarterly distribution of $0.89375
per unit for the three months ended September 30, 2009 and
the number of its common units outstanding on November 9,
2009, the record date for such distribution, ETE was entitled to
receive a quarterly cash distribution of $149.0 million,
which consists of $4.9 million from our indirect ownership
of the general partner interest in ETP, $88.2 million from
our indirect ownership of the incentive distribution rights in
ETP and $55.9 million from the common units of ETP that we
currently own.
Nine of the 11 current directors of LE GP, our general partner,
are also directors of the general partner of ETP. In addition,
Mr. Warren is also an executive officer of the general
partner of ETP.
Under the terms of a shared services agreement, ETE pays ETP an
annual administrative fee of $0.5 million for the provision
of various general and administrative services for ETEs
benefit.
ETPs natural gas midstream operations secure compression
services from third parties. Energy Transfer Technologies, Ltd.
is one of the entities from which ETP obtains compression
services. Energy Transfer Group, LLC, or ETG, is the general
partner of Energy Transfer Technologies, Ltd. ETG was
contributed to ETP, effective August 17, 2009. The
membership interests of ETG were contributed to ETP by
Mr. Warren and by two entities, one of which is controlled
by Ray C. Davis and the other by Ted Collins, Jr.
Messrs. Warren and Davis serve on the board of directors of
the general partners of both ETE and ETP, and Mr. Collins
serves on the board of directors of the general partner of ETP.
In addition, Mr. Collins and our President and Chief
Financial Officer, John W. McReynolds, served on the board of
directors of ETG. In exchange for the membership interests in
ETG, the former members acquired the right to receive (in cash
or ETP common units), future amounts to be determined based on
the terms of the contribution arrangement. These contingent
amounts are to be determined in 2014 and 2017, and the former
members of ETG will receive payments contingent on the acquired
operations performing at a level above the average return
required by ETP for approval of its own growth projects during
the period since acquisition. In addition, the former members
may be required to make cash payments to ETP under certain
circumstances. In connection with this transaction, ETP assumed
liabilities of $33.1 million and recorded goodwill of
$1.3 million.
Transactions
with Enterprise
On December 23, 2009, Dan L. Duncan and Ralph S. Cunningham
were appointed as directors of our general partner.
Mr. Duncan is Chairman and a director of EPE Holdings, LLC,
the general partner of Enterprise GP; Chairman and a director of
Enterprise Products GP, LLC, the general partner of Enterprise
Products Partners L.P., or EPD; and Group Co-Chairman of EPCO,
Inc. TEPPCO Partners, L.P., or TEPPCO is also an affiliate of
EPE. Dr. Cunningham is the President and Chief Executive
Officer of EPE Holdings, LLC, the general partner of Enterprise
GP. These entities and other affiliates of Enterprise and
Enterprise GP are referred to herein collectively as the
Enterprise Entities. Mr. Duncan directly or
indirectly beneficially owns various interests in the Enterprise
Entities, including various general partner interests and
approximately 77.1% of the common units of Enterprise GP, and
approximately 34% of the common units of EPD. On
October 26, 2009, TEPPCO became a wholly owned subsidiary
of Enterprise.
S-108
The propane operations of ETP routinely enter into purchases and
sales of propane with certain of the Enterprise Entities,
including purchases under a long-term contract of Titan, to
purchase substantially all of its propane requirements through
certain of the Enterprise Entities. This agreement was in effect
prior to ETPs acquisition of Titan in 2006 and expires in
2010.
From time to time, ETPs natural gas operations purchase
from, and sell to, the Enterprise Entities natural gas and NGLs,
in the ordinary course of business. An ETP operating unit has a
monthly natural gas storage contract with TEPPCO. ETPs
natural gas operations and the Enterprise Entities transport
natural gas on each others pipelines and share operating
expenses on jointly-owned pipelines.
The volumes and dollar amounts (both in thousands) involved in
transactions between ETP and the Enterprise Entities during the
nine-month period ended September 30, 2009 were as follows:
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|
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|
|
|
|
|
|
|
|
Product
|
|
Volumes
|
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Dollars
|
|
Nine Months Ended September 30, 2009
|
|
|
|
|
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|
|
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|
Propane Operations:
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|
|
|
|
|
|
|
|
|
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Sales to Enterprise Entities
|
|
Propane (gallons)
|
|
|
20,370
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|
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$
|
14,046
|
|
|
|
Derivative Activity
|
|
|
|
|
|
|
277
|
|
Purchases from Enterprise Entities
|
|
Propane (gallons)
|
|
|
206,344
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|
|
$
|
181,853
|
|
|
|
Derivative Activity
|
|
|
|
|
|
|
38,392
|
|
Natural Gas Operations:
|
|
|
|
|
|
|
|
|
|
|
Sales to Enterprise Entities
|
|
NGLs (gallons)
|
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368,652
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|
$
|
259,417
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|
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|
Natural Gas (MMBtu)
|
|
|
7,476
|
|
|
|
27,165
|
|
|
|
Fees
|
|
|
|
|
|
|
(3,236
|
)
|
Purchases from Enterprise Entities
|
|
Natural Gas Imbalances
(MMBtu)
|
|
|
617
|
|
|
$
|
1,903
|
|
|
|
Natural Gas (MMBtu)
|
|
|
7,089
|
|
|
|
27,359
|
|
|
|
Fees
|
|
|
|
|
|
|
42
|
|
S-109
DESCRIPTION
OF OTHER INDEBTEDNESS
Our consolidated indebtedness as of September 30, 2009
includes our $1.45 billion term loan facility maturing on
November 1, 2012 and our $500.0 million revolving
credit facility available through February 8, 2011.
The following table shows the debt of ETP outstanding as of
September 30, 2009 (the ETP Senior Notes):
|
|
|
|
|
Issue
|
|
Amount
|
|
|
|
(In millions)
|
|
|
5.65% Senior Notes due 2012
|
|
$
|
400.0
|
|
6.00% Senior Notes due 2013
|
|
$
|
350.0
|
|
8.50% Senior Notes due 2014
|
|
$
|
350.0
|
|
5.95% Senior Notes due 2015
|
|
$
|
750.0
|
|
6.125% Senior Notes due 2017
|
|
$
|
400.0
|
|
6.70% Senior Notes due 2018
|
|
$
|
600.0
|
|
9.70% Senior Notes due 2019
|
|
$
|
600.0
|
|
9.00% Senior Notes due 2019
|
|
$
|
650.0
|
|
6.625% Senior Notes due 2036
|
|
$
|
400.0
|
|
7.50% Senior Notes due 2038
|
|
$
|
550.0
|
|
|
|
|
|
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Total
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|
$
|
5,050.0
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|
|
|
|
|
|
ETP also has a revolving credit facility that allows for
borrowings of up to $2.0 billion (expandable to
$3.0 billion) available through July 20, 2012. ETP
also has separate indebtedness at Transwestern and HOLP.
The terms of our indebtedness and our subsidiaries are described
in more detail below. Failure to comply with the various
restrictive and affirmative covenants of the credit agreements
could negatively impact our ability and the ability of our
subsidiaries to incur additional debt and our subsidiaries
ability to pay distributions. We and our subsidiaries are
required to measure these financial tests and covenants
quarterly and, as of September 30, 2009, we and our
subsidiaries were in compliance with all financial requirements,
tests, limitations, and covenants related to financial ratios
under our existing credit agreements.
ETE
Existing Revolving Credit and Term Loan Facilities
The total outstanding amount borrowed under our revolving credit
and term loan facilities as of September 30, 2009 was
$1.57 billion. The total amount available under our debt
facilities as of September 30, 2009 was approximately
$376.1 million.
The commitment fee payable on the unused portion of our existing
credit facility is a percentage that fluctuates based on our
leverage ratio and is currently 0.300%. Loans under our existing
revolving credit facility bear interest at our option at either
(a) the Eurodollar rate plus the applicable margin or
(b) the base rate plus the applicable margin. The
applicable margins are also based on our leverage ratio. The
term loans bear interest at our option at either (a) the
Eurodollar rate plus 1.75% per annum or (b) the prime rate
plus 0.25% per annum. At September 30, 2009, the weighted
average interest rate was 2.17% for the amounts outstanding
under our revolving credit and term loan facilities.
Contemporaneously with the consummation of this offering, the
outstanding borrowings under our term loan facility will be
repaid in full and the term loan facility will be terminated,
the commitments under our existing revolving credit facility
will be terminated and the revolving loans thereunder will be
repaid in full and we will enter into a new $200 million
senior secured revolving credit facility, which will replace our
existing revolving credit facility. The new revolving credit
facility permits us to seek additional commitments from one or
more lenders for up to $50 million of additional borrowing
capacity under the facility without approval of the other
lenders, subject to certain additional requirements being met.
The new revolving credit facility will become effective upon the
closing of the offering of the notes and mature on the fifth
anniversary of the closing of the offering of the notes.
S-110
The new revolving credit facilitys principal terms and
conditions will be similar to those of the existing revolving
credit facility, including provisions for a pricing grid that
determines the applicable rates for Eurodollar and base rate
loans and the percentage of commitment fees payable on the
unused portion of the revolving credit commitments based on our
leverage ratio. The commitment fee payable on the unused portion
of our new revolving credit facility will be 0.500% effective as
of the closing of the offering of the notes. Loans under our new
revolving credit facility will bear interest at our option at
either (a) the Eurodollar rate plus the applicable margin
or (b) the base rate plus the applicable margin. The new
revolving loans will bear interest effective as of the closing
of the offering of the notes at our option at either
(a) the Eurodollar rate plus 3.25% per annum or
(b) the prime rate plus 2.25% per annum. Up to
$10 million of the new revolving credit facility will be
available for swingline loans and up to $50 million will be
available for the issuance of letters of credit.
Our new revolving credit facility will be secured by a lien on
substantially all of our tangible and intangible assets,
including our ownership of 62,500,797 ETP common units, our 100%
interest in ETP LLC and ETP GP with indirect recourse to ETP
GPs general partner interest in ETP, and ETP GPs
outstanding incentive distribution rights in ETP, which we hold
through our ownership of ETP GP.
The new revolving credit facility will contain covenants that
limit (subject to certain exceptions) our ability to take the
following actions:
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incur indebtedness;
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grant liens;
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enter into mergers;
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|
dispose of assets;
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make distributions;
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make certain investments;
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enter into restrictive agreements;
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enter into speculative hedging contracts;
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commingle deposit accounts with certain subsidiaries;
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amend our organizational documents or material agreements;
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change our fiscal year; and
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change the tax status of certain subsidiaries.
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The new revolving credit facility will contain the following
financial covenants:
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On a quarterly basis and on the dates that we acquire or dispose
of units or make permitted distributions, our leverage ratio, as
described in the revolving credit facility, must not exceed 4.5
to 1.0, with a permitted increase to 5.0 to 1.0 during a
specified acquisition period.
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On a quarterly basis and on the dates that we acquire or dispose
of units or make permitted distributions, our leverage ratio, as
described in the revolving credit facility and calculated using
ETPs earnings before interest, taxes, depreciation and
amortization, must not exceed 5.5 to 1.0.
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The interest coverage ratio, as described in the revolving
credit facility, must never be less than 3.0 to 1.0.
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The value to loan ratio, as described in the revolving credit
facility, must never be less than 2.0 to 1.0.
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The new revolving credit facility will contain a prohibition on
distributions by us in the event we are not, or any such
distribution would cause us not to be, in compliance with the
financial covenants described above.
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The new revolving credit facility will contain customary events
of default. An event of default could prevent us from borrowing
under our revolving credit facility, which would in turn have a
material adverse effect on our available liquidity, and could
also result in us having to immediately repay all amounts
outstanding under our revolving credit facility and in the
foreclosure of liens on our assets.
ETP
Revolving Credit Facility
On July 20, 2007, ETP entered into the ETP Credit Facility
with Wachovia Bank, National Association, as administrative
agent, Bank of America, N.A., as syndication agent, and certain
other agents and lenders. The ETP Credit Facility provides for
$2.0 billion of revolving credit capacity that is
expandable to $3.0 billion at ETPs option (subject to
obtaining the approval of the administrative agent and securing
lender commitments for the increased borrowing capacity). The
ETP Credit Facility matures on July 20, 2012, unless ETP
elects the option of one-year extensions (subject to the
approval of each such extension by the lenders holding a
majority of the aggregate lending commitments under the ETP
Credit Facility). On the maturity date of the ETP Credit
Facility, the outstanding revolving loans will be converted into
one-year term loans unless a default then exists. Amounts
borrowed under the ETP Credit Facility bear interest at a rate
based on either a Eurodollar rate or a prime rate. Up to
$300 million of the revolving commitments under the ETP
Credit Facility are available as swingline loans. The
indebtedness under the ETP Credit Facility is prepayable at any
time at ETPs option without penalty (other than Eurodollar
Loan breakage costs, if any). The commitment fee payable on the
unused portion of the ETP Credit Facility varies based on
ETPs credit rating, and the fee is 0.11% based on our
current rating, with a maximum fee of 0.125%.
The credit agreement relating to the ETP Credit Facility
contains covenants that limit (subject to certain exceptions)
ETPs and certain of its subsidiaries ability to, among
other things:
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incur indebtedness;
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grant liens;
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enter into mergers;
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dispose of assets;
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make distributions during certain defaults and during any event
of default;
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make certain investments;
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engage in business substantially different in nature than the
business currently conducted by ETP and its subsidiaries;
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engage in transactions with affiliates;
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enter into restrictive agreements; and
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enter into speculative hedging contracts.
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This credit agreement also contains a financial covenant that
provides that on each date ETP makes a distribution, the
leverage ratio, as defined in the ETP Credit Facility, must not
exceed 5.0 to 1, with a permitted increase to 5.5 to 1 during a
specified acquisition period, as defined in the ETP Credit
Facility. This financial covenant could therefore restrict
ETPs ability to make cash distributions to its
unitholders, its general partner and the holder of its incentive
distribution rights.
As of September 30, 2009, there was a balance of
$483.3 million in revolving credit loans outstanding and
$65.1 million in letters of credit issued. See Use of
Proceeds for additional information about the ETP Credit
Facility. The weighted average interest rate on the total amount
outstanding at September 30, 2009 was
S-112
0.82%. The total amount available for additional borrowing under
the ETP Credit Facility, as of September 30, 2009, was
$1.45 billion. The indebtedness under the ETP Credit
Facility is unsecured and not guaranteed by any of its
subsidiaries. The indebtedness under the ETP Credit Facility has
equal rights to holders of ETPs other current and future
unsecured debt.
ETP
Senior Notes
The ETP Senior Notes represent ETPs senior unsecured
obligations and rank equally with all of ETPs other
existing and future unsecured and unsubordinated indebtedness.
The holders of the 9.70% Senior Notes due 2019 have the
right to require ETP to repurchase all or a portion of the notes
on March 15, 2012 at 100% of the principal amount plus any
accrued interest as of that date. The ETP Senior Notes
effectively rank junior to all indebtedness and other
liabilities of ETPs existing and future subsidiaries. The
ETP Senior Notes are unsecured and not guaranteed by any of
ETPs subsidiaries, but if certain subsidiaries guarantee
the obligations of ETP under the ETP Credit Facility, then those
subsidiaries must guarantee the obligations of ETP under its
senior notes. The ETP Senior Notes were issued under an
indenture containing covenants that restrict ETPs ability
to, subject to certain exceptions, incur debt secured by liens,
engage in sale and leaseback transactions, merge or consolidate
with another entity or sell substantially all of its assets.
HOLP
Debt
HOLP
Notes
ETPs subsidiary HOLP has outstanding several series of
notes, which we refer to collectively as the HOLP notes, that
are secured by all receivables, contracts, equipment, inventory,
general intangibles and cash concentration accounts of HOLP and
the equity interests of HOLP in its subsidiaries. As of
September 30, 2009, the outstanding principal balance of
the HOLP notes was $144.9 million. The HOLP notes mature at
various times from 2009 to 2016 and bear interest at fixed rates
that range from 7.17% to 8.87%. The HOLP notes generally require
annual prepayments in specified amounts and also permit
voluntary prepayments subject to make-whole premiums. HOLP is
required to make an offer to prepay the notes with the net cash
proceeds from asset sales that exceed an amount described in the
note purchase agreement relating to the HOLP notes unless the
proceeds are to be reinvested. It is also required to make an
offer to prepay the notes upon a change of control, as defined
in the note purchase agreement.
HOLP
Credit Facility
Effective August 31, 2006, HOLP entered into the Fourth
Amended and Restated Credit Agreement that provides for a
$75.0 million senior revolving credit facility which may be
expanded to $150.0 million. The credit facility is
available through June 30, 2011. Amounts borrowed under
this credit facility bear interest at a rate based on either a
Eurodollar rate or a prime rate. The commitment fee payable on
the unused portion of the facility varies based on HOLPs
leverage ratio, as defined, with a maximum fee of 0.50%. This
credit facility also has a swingline loan option with a maximum
borrowing of $10.0 million at a prime rate. The sum of the
loans, swingline loans and letters of credit may not exceed the
maximum amount of revolving credit available under the credit
facility. The agreement related to this credit facility includes
provisions that may require contingent prepayments in the event
of dispositions, sale of assets, issuance of capital stock or
change of control. This credit facility is secured by all
receivables, contracts, equipment, inventory, general
intangibles and cash concentration accounts of HOLP and the
equity interests of HOLP in its subsidiaries. As of
September 30, 2009, HOLP had no outstanding borrowings
under this credit facility and had outstanding letters of credit
in the amount of $1 million. The total amount available
under the HOLP Credit Facility as of September 30, 2009 was
$74 million.
Covenants
Related to HOLP Debt
The agreements related to the HOLP notes and the HOLP revolving
credit facility contain customary restrictive covenants
applicable to HOLP, including the maintenance of various
financial covenants and limitations on disposition of assets,
incurrence of indebtedness and creation of liens. The financial
covenants
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in the HOLP revolving credit facility require HOLP to maintain
ratios of Adjusted Consolidated Funded Indebtedness to Adjusted
Consolidated EBITDA (as these terms are defined in the HOLP
revolving credit facility) of not more than 4.75 to 1,
Consolidated EBITDA to Consolidated Interest Expense (as these
terms are defined in the HOLP revolving credit facility) of not
less than 2.25 to 1, and Consolidated Funded Indebtedness to
Consolidated EBITDA (as defined in the HOLP revolving credit
facility) of not more than 4.5 to 1, and the agreements relating
to the HOLP notes contain similar covenants. These debt
agreements also provide that HOLP may declare, make, or incur a
liability to make, restricted payments during each fiscal
quarter, if: (a) the amount of such restricted payment,
together with all other restricted payments during such quarter,
do not exceed the amount of Available Cash (as defined in the
agreements related to the HOLP notes and HOLP revolving credit
facility) with respect to the immediately preceding quarter
(which amount is required to reflect a reserve equal to 50% of
the interest to be paid on the HOLP notes and in addition, in
the third, second and first quarters preceding a quarter in
which a scheduled principal payment is to be made on the HOLP
notes, and a reserve equal to 25%, 50%, and 75%, respectively,
of the principal amount to be repaid on such payment dates),
(b) no default or event of default exists before such
restricted payments, and (c) the amounts of HOLPs
restricted payment does not exceed its pro rata share of cash
available to fund payment obligations of ETP and its general
partner with respect to ETPs common units.
Transwestern
Debt
As of September 30, 2009, ETPs subsidiary
Transwestern had outstanding five series of unsecured notes,
which we refer to collectively as the Transwestern notes, with
the following terms:
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Fixed Interest
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Principal Amount
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Rate per Annum
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Maturity Date
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(In millions)
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$88.0
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5.39%
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November 17, 2014
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$125.0
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5.54%
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November 17, 2016
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$82.0
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5.64%
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May 24, 2017
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$150.0
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5.89%
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May 24, 2022
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$75.0
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6.16%
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May 24, 2037
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No principal payments are required with respect to the
Transwestern notes (except at maturity); however, Transwestern
is required to make an offer to prepay the notes of each series
with the net cash proceeds from asset sales that exceed an
amount described in the note purchase agreement relating to that
series of notes unless the proceeds are to be reinvested. It is
also required to make an offer to prepay all of the notes of
each series upon a change of control of Transwestern, as defined
in the note purchase agreement relating to that series of notes.
The Transwestern notes are prepayable by Transwestern at any
time subject to the payment of specified make-whole premiums.
Interest is payable semi-annually on the Transwestern notes. The
Transwestern notes rank pari passu with
Transwesterns other unsecured unsubordinated debt. The
agreements governing the Transwestern notes contain provisions
that limit the amount of Transwesterns debt, restrict its
sale of assets, restrict its payment of dividends and require it
to maintain certain debt to capitalization ratios.
On December 9, 2009, Transwestern closed a private offering
of $175 million aggregate principal amount of
5.36% senior unsecured notes due 2020 and $175 million
aggregate principal amount of 5.66% senior unsecured notes
due 2024. Transwestern used the net proceeds from this offering
to repay intercompany debt utilized to fund the construction of
the Phoenix pipeline expansion project and for general corporate
purposes. Interest will be paid semi-annually. Transwestern is
required to make an offer to prepay these notes with the net
cash proceeds from asset sales that exceed an amount described
in the note purchase agreement relating to these notes unless
the proceeds are to be reinvested. It is also required to make
an offer to prepay these notes upon a change of control, as
defined in the note purchase agreement.
Other
Long-Term Debt
In connection with ETPs August 2009 acquisition of Energy
Transfer Group, L.L.C., ETP assumed $17.0 million of
long-term debt with interest rates averaging 7.48% and
maturities through 2015.
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Guarantee
of Midcontinent Express Pipeline LLC Credit Facility
On February 29, 2008, MEP, ETPs joint venture with
KMP, entered into a credit agreement that initially provided for
the MEP Facility, a $1.4 billion senior revolving credit
facility. ETP guaranteed 50% of the obligations of MEP under the
MEP Facility, with the remaining 50% of MEP Facility obligations
guaranteed by KMP. Subject to certain exceptions, ETPs
guarantee may be proportionately increased or decreased (but not
below 40% of the MEP Facility obligations) if ETPs
ownership percentage increases or decreases. The MEP Facility is
available through February 28, 2011. Amounts borrowed under
the MEP Facility bear interest at a rate based on either a
Eurodollar rate or a prime rate. The commitment fee payable on
the unused portion of the MEP Facility varies based on both our
debt rating and that of KMP, with a maximum fee of 0.15%. The
MEP Facility also has a swingline loan option with a maximum
borrowing of $25.0 million at a prime rate. The sum of the
loans, swingline loans and letters of credit may not exceed the
maximum amount of revolving credit available under the MEP
Facility. The indebtedness under the MEP Facility is prepayable
at any time at the option of MEP without penalty. The MEP
Facility contains covenants that limit (subject to certain
exceptions) MEPs ability to grant liens, incur
indebtedness, engage in transactions with affiliates, enter into
restrictive agreements, enter into mergers or dispose of
substantially all of its assets. As of September 30, 2009,
MEP had $371.6 million of outstanding borrowings and
$33.3 million of letters of credit issued under the MEP
Facility. In September 2009, MEP issued senior notes totaling
$800.0 million, the proceeds of which were used to repay
borrowings under the MEP Facility. The senior notes issued by
MEP are not guaranteed by ETP or KMP. In October 2009, ETP made
an additional capital contribution of $200 million to MEP,
which MEP used to further reduce the outstanding borrowings
under the MEP Facility. Subsequent to this repayment, the
commitment amount under the MEP Facility was reduced from
$1.4 billion to $275 million.
Guarantee
of Fayetteville Express Pipeline, LLC Credit Facility
On November 13, 2009, FEP, ETPs other joint venture
with KMP, entered into a $1.1 billion senior revolving
credit facility, or the FEP Facility, which FEP will use to fund
construction costs and other expenses related to the
construction of the Fayetteville Express pipeline. ETP
guaranteed 50% of the obligations of FEP under the FEP Facility,
with the remaining 50% of FEP Facility obligations guaranteed by
KMP. Subject to certain exceptions, ETPs guarantee may be
proportionately increased or decreased (but not below 40% of the
FEP Facility obligations) if ETPs ownership percentage
increases or decreases. The FEP Facility is available through
May 11, 2012. Amounts borrowed under the FEP Facility bear
interest at a rate based on either a Eurodollar rate or a prime
rate. The commitment fee payable on the unused portion of the
FEP Facility varies based on both our debt rating and that of
KMP, with a maximum fee of 1.0%. The FEP Facility also has a
swingline loan option with a maximum borrowing of
$50.0 million at a prime rate. The sum of the loans,
swingline loans and letters of credit may not exceed the maximum
amount of revolving credit available under the FEP Facility. The
indebtedness under the FEP Facility is prepayable at any time at
the option of FEP without penalty. The FEP Facility contains
covenants that limit (subject to certain exceptions) FEPs
ability to grant liens, incur indebtedness, engage in
transactions with affiliates, enter into restrictive agreements,
enter into mergers or dispose of substantially all of its assets.
S-115
DESCRIPTION
OF NOTES
ETE will issue the notes as new series of its debt securities
described in the accompanying prospectus. The notes will be
issued under an indenture, as supplemented by a supplemental
indenture establishing the notes, to be dated as of the closing
of this offering (the indenture) between
itself and U.S. Bank National Association, as trustee (the
Trustee). This description is a summary of
the material provisions of the notes and the indenture. The
summary of selected provisions of the notes and the indenture
referred to below supplements, and to the extent inconsistent
supersedes and replaces, the description of the general terms
and provisions of the debt securities and the indenture
contained in the accompanying prospectus under the caption
Description of Debt Securities. This description
does not restate those agreements and instruments in their
entirety. You should refer to the notes and the indenture, forms
of which are available as set forth below under Where You
Can Find More Information, for a complete description of
our obligations and your rights.
You can find the definitions of various terms used in this
description under Definitions below. In
this description, the terms ETE, we,
us and our refer only to Energy Transfer
Equity, L.P. and not to any of its Subsidiaries or Affiliates.
The registered holder of a note (each, a
Holder) will be treated as the owner of it
for all purposes. Only registered Holders will have rights under
the indenture.
General
The notes will:
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be general unsecured senior obligations of ETE, ranking equally
with all other existing and future unsecured and unsubordinated
indebtedness of ETE;
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initially be issued in an aggregate principal amount of
$
with respect to the 2017 notes and an aggregate principal
amount of
$
with respect to the 2020 notes;
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mature on February 28, 2017, with respect to the
2017 notes and February 28, 2020, with respect to the
2020 notes;
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be issued in denominations of $2,000 and integral multiples of
$1,000 in excess thereof;
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bear interest at an annual rate
of % with respect to the
2017 notes and an annual rate
of % with respect to the
2020 notes; and
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be redeemable at any time at our option at the redemption price
described below under Optional
Redemption.
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The 2017 notes and 2020 notes each constitute a separate series
of debt securities under the indenture. The indenture does not
limit the amount of debt securities we may issue under the
indenture from time to time in one or more series. We may in the
future issue additional debt securities under the indenture in
addition to the notes.
Interest
Interest on the notes will accrue from and
including ,
2010 or from and including the most recent interest payment date
to which interest has been paid or provided for. We will pay
interest on the notes in cash semi-annually in arrears on
February 28 and August 31 of each year, beginning
August 31, 2010. We will make interest payments to the
Holders of record at the close of business on February 15
or August 15, as applicable, before the next interest
payment date.
Interest on the notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it
was most recently paid. Interest will be computed on the basis
of a 360-day
year comprised of twelve
30-day
months. If a payment date is a Legal Holiday at a place of
payment, payment may be made at
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that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue on such payment for the
intervening period.
Methods
of Receiving Payments on the Notes
If a Holder of notes has given wire transfer instructions to
ETE, ETE will pay all principal, premium, if any, and interest
on that Holders notes in accordance with those
instructions. All other payments on the notes will be made at
the office or agency of the paying agent and registrar, unless
we elect to make interest payments by check mailed to the
Holders at their address set forth in the register of Holders.
Further
Issuances
We may from time to time, without notice to or the consent of
the Holders of the notes, create and issue additional notes
having the same terms as either of the series of notes offered
by this prospectus supplement and accompanying prospectus,
except for the issue price and in some cases, the first interest
payment date. Additional notes issued in this manner will form a
single series with the previously issued and outstanding notes
of such series.
Paying
Agent and Registrar
Initially, the Trustee will act as paying agent and registrar
for the notes. We may change the paying agent or registrar for
the notes without prior notice to the Holders of the notes, and
we or any of the Restricted Subsidiaries may act as paying agent
or registrar; provided, however, that we will be required
to maintain at all times an office or agency in the Borough of
Manhattan, The City of New York (which may be an office of the
Trustee or an affiliate of the Trustee or the registrar or a
co-registrar for the notes) where the notes may be presented for
payment and where notes may be surrendered for registration of
transfer or for exchange and where notices and demands to or
upon us in respect of the notes and the indenture may be served.
We may also from time to time designate one or more additional
offices or agencies where the notes may be presented or
surrendered for any or all such purposes and may from time to
time rescind such designations; provided, however,
that no such designation or rescission will in any manner
relieve us of our obligation to maintain an office or agency in
the Borough of Manhattan, The City of New York for such purposes.
The registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer
documents in connection with a transfer of the notes, and ETE
may require a Holder to pay any taxes and fees required by law
or permitted by the indenture. ETE will not be required to
transfer or exchange any note (or portion of a note) selected
for redemption. Also, ETE will not be required to transfer or
exchange any note for a period of 15 days before a
selection of notes to be redeemed.
Subsidiary
Guarantees
The notes initially will not be guaranteed by any of our
Subsidiaries. However, if at any time following the Issue Date,
any Subsidiary of ETE guarantees or becomes a co-obligor with
respect to any obligations of ETE in respect of any Indebtedness
of ETE under the Credit Agreement, then ETE will cause such
Subsidiary to promptly execute and deliver to the Trustee a
supplemental indenture in a form satisfactory to the Trustee
pursuant to which such Subsidiary will guarantee all obligations
of ETE with respect to the notes on the terms provided for in
the indenture. The Subsidiary Guarantees will be joint and
several obligations of the Subsidiary Guarantors. The
obligations of each Subsidiary Guarantor under its Subsidiary
Guarantee will be limited as necessary to prevent that
Subsidiary Guarantee from constituting a fraudulent conveyance
under applicable law.
The Subsidiary Guarantee of any Subsidiary Guarantor may be
released under certain circumstances. If ETE exercises its legal
or covenant defeasance option with respect to the notes as
described below under Defeasance and
Discharge, then any Subsidiary Guarantor will be released
from its Subsidiary Guarantee. Further, if no default has
occurred and is continuing under the indenture, and to the
extent not otherwise
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prohibited by the indenture, a Subsidiary Guarantor will be
unconditionally released and discharged from its Subsidiary
Guarantee:
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automatically upon any direct or indirect sale, transfer or
other disposition, whether by way of merger or otherwise, to any
Person that is not an Affiliate of ETE, of (a) all Capital
Stock representing ownership of such Subsidiary Guarantor or
(b) all or substantially all the assets of such Subsidiary
Guarantor;
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following delivery by ETE to the Trustee of an officers
certificate to the effect that such Subsidiary Guarantor has
been released from all guarantees or obligations in respect of
any Indebtedness of ETE under the Credit Agreement; or
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upon legal defeasance or satisfaction and discharge of the
indenture as provided below under the caption
Defeasance and Discharge.
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If at any time following any release of a Subsidiary of ETE from
its Subsidiary Guarantee pursuant to the second bullet point in
the preceding paragraph, such Subsidiary again guarantees or
becomes a co-obligor with respect to any obligations of ETE in
respect of any Indebtedness of ETE under the Credit Agreement,
then ETE will cause such Subsidiary to again guarantee the notes
in accordance with the indenture.
Ranking
The notes:
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will rank senior in right of payment to all future obligations
of ETE that are, by their terms, expressly subordinated in right
of payment to the notes and pari passu in right of
payment with all existing and future senior obligations of ETE
that are not so subordinated;
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will be structurally subordinated to all liabilities and
preferred equity of Subsidiaries of ETE that are not Subsidiary
Guarantors; and
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will be guaranteed by each Subsidiary of ETE that in the future
is required to become a Subsidiary Guarantor.
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Each Subsidiary Guarantee will rank senior in right of payment
to all future obligations of such Subsidiary Guarantor that are,
by their terms, expressly subordinated in right of payment to
such Subsidiary Guarantee and pari passu in right of
payment with all existing and future senior obligations of such
Subsidiary Guarantor that are not so subordinated.
The notes will be effectively subordinated to all existing and
future obligations, including Indebtedness, of any Subsidiaries
of ETE that do not guarantee the notes. Claims of creditors of
these Subsidiaries, including trade creditors, will generally
have priority as to the assets of these Subsidiaries over the
claims of ETE and the holders of ETEs Indebtedness,
including the notes. As of September 30, 2009, ETEs
Subsidiaries had outstanding approximately $6.2 billion of
indebtedness, all of which would rank effectively senior to the
notes to the extent of the assets of such Subsidiaries.
Furthermore, the notes and each Subsidiary Guarantee will be
effectively subordinated to secured Indebtedness of ETE and the
applicable Subsidiary Guarantor to the extent of the value of
the assets securing such Indebtedness. Borrowings under the
Credit Agreement will be secured by a substantial portion of the
assets of ETE and its Subsidiaries other than ETP and its
Subsidiaries.
Optional
Redemption
The notes of either series will be redeemable, at our option, at
any time in whole, or from time to time in part, at a price
equal to the greater of:
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100% of the principal amount of the notes to be
redeemed; and
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the sum of the present values of the remaining scheduled
payments of principal and interest on the notes to be redeemed
that would be due after the related redemption date but for such
redemption (exclusive of interest accrued to the redemption
date) discounted to the redemption date on a semi-
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S-118
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annual basis (assuming a
360-day year
consisting of twelve
30-day
months) at the applicable Treasury Yield plus 50 basis
points;
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plus, in either case, accrued interest to the redemption
date.
The actual redemption price, calculated as provided below, will
be calculated and certified to the Trustee and us by the
Independent Investment Banker.
Notes called for redemption become due on the redemption date.
Notices of redemption will be mailed at least 30 but not more
than 60 days before the redemption date to each Holder of
the notes to be redeemed at its registered address. The notice
of redemption for the notes will state, among other things, the
amount of notes to be redeemed, the redemption date, the method
of calculating the redemption price and each place that payment
will be made upon presentation and surrender of notes to be
redeemed. Unless we default in payment of the redemption price,
interest will cease to accrue on any notes that have been called
for redemption on the redemption date.
For purposes of determining the redemption price, the following
definitions are applicable:
Treasury Yield means, with respect to any
redemption date, (a) the yield, under the heading which
represents the average for the immediately preceding week,
appearing in the most recently published statistical release
designated H.15(519) or any successor publication
which is published weekly by the Board of Governors of the
Federal Reserve System and which establishes yields on actively
traded United States Treasury securities adjusted to
constant maturity under the caption Treasury Constant
Maturities, for the maturity corresponding to the
Comparable Treasury Issue; or (b) if the release (or any
successor release) is not published during the week preceding
the calculation date or does not contain these yields, the rate
per annum equal to the semi-annual equivalent yield to maturity
(computed as of the third business day immediately preceding
such redemption date) of the Comparable Treasury Issue, assuming
a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the applicable
Comparable Treasury Price for such redemption date.
Comparable Treasury Issue means the United
States Treasury security selected by the Independent Investment
Banker as having a maturity comparable to the remaining term of
the notes to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice,
in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of the notes to be redeemed;
provided, however, that if no maturity is within
three months before or after the maturity date for such notes,
yields for the two published maturities most closely
corresponding to such United States Treasury security will be
determined and the treasury rate will be interpolated or
extrapolated from those yields on a straight line basis rounding
to the nearest month.
Comparable Treasury Price means, with respect
to any redemption date, (a) the average of the Reference
Treasury Dealer Quotations for the redemption date, after
excluding the highest and lowest Reference Treasury Dealer
Quotations, or (b) if the Independent Investment Banker
obtains fewer than four Reference Treasury Dealer Quotations,
the average of all such quotations.
Independent Investment Banker means Credit
Suisse Securities (USA) LLC, Morgan Stanley & Co.
Incorporated, Wells Fargo Securities, LLC, Banc of America
Securities LLC and UBS Securities LLC (and their respective
successors) or, if any such firm is not willing and able to
select the applicable Comparable Treasury Issue, an independent
investment banking institution of national standing appointed by
the Trustee and reasonably acceptable to ETE.
Reference Treasury Dealer means (a) each
of Credit Suisse Securities (USA) LLC, Morgan
Stanley & Co. Incorporated, Wells Fargo Securities,
LLC, Banc of America Securities LLC and UBS Securities LLC and
their respective successors, and (b) one other primary
U.S. government securities dealer in the United States
selected by ETE (each, a Primary Treasury
Dealer); provided, however, that if any of the
foregoing shall resign as a Reference Treasury Dealer or cease
to be a U.S. government securities dealer, ETE will
substitute therefor another Primary Treasury Dealer.
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Reference Treasury Dealer Quotations means,
with respect to each Reference Treasury Dealer and any
redemption date for the notes, an average, as determined by the
Independent Investment Banker, of the bid and asked prices for
the Comparable Treasury Issue for the notes to be redeemed
(expressed in each case as a percentage of its principal amount)
quoted in writing to the Trustee by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third
business day preceding such redemption date.
Selection
and Notice
If less than all of the notes of either series are to be
redeemed at any time, the Trustee will select notes of such
series for redemption on a pro rata basis unless otherwise
required by law or applicable stock exchange requirements.
No notes of $2,000 or less can be redeemed in part. Notices of
redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each
Holder of notes to be redeemed at its registered address, except
that redemption notices may be mailed more than 60 days
prior to a redemption date if the notice is issued in connection
with a defeasance of the notes or a satisfaction and discharge
of the indenture.
If any note is to be redeemed in part only, the notice of
redemption that relates to such note shall state the portion of
the principal amount thereof to be redeemed. A new note in
principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of
the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date,
interest will cease to accrue on notes or portions of notes
called for redemption, unless ETE defaults in making the
redemption payment.
Open
Market Purchases; No Mandatory Redemption or Sinking
Fund
We may at any time and from time to time purchase notes in the
open market or otherwise. We are not required to make mandatory
redemption or sinking fund payments with respect to the notes.
Covenants
Change
of Control
If a Change of Control Triggering Event with respect to the
notes of any series occurs, each Holder of notes of that series
will have the right to require ETE to repurchase all or any part
(equal to $1,000 or an integral multiple of $1,000) of that
Holders notes pursuant to an offer (Change of
Control Offer) on the terms set forth in the
indenture. In the Change of Control Offer, ETE will offer a
payment in cash (the Change of Control
Payment) equal to 101% of the aggregate principal
amount of notes repurchased plus accrued and unpaid interest on
the notes repurchased to the date of purchase (the
Change of Control Payment Date), subject to
the rights of Holders of notes on the relevant record date to
receive interest, if any, due on the relevant interest payment
date. Within 30 days following any Change of Control
Triggering Event, ETE will mail a notice to each Holder
describing the transaction or transactions that constitute the
Change of Control Triggering Event and offering to repurchase
notes on the Change of Control Payment Date specified in the
notice, which date will be no earlier than 30 days and no
later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the indenture and
described in such notice. ETE will comply with the requirements
of
Rule 14e-1
under the Exchange Act and any other securities laws and
regulations thereunder to the extent those laws and regulations
are applicable in connection with the repurchase of the notes as
a result of a Change of Control Triggering Event. To the extent
that the provisions of any securities laws or regulations
conflict with the Change of Control Triggering Event provisions
of the indenture, ETE will comply with the applicable securities
laws and regulations and will not be deemed to have breached its
obligations under the Change of Control Triggering Event
provisions of the indenture by virtue of such compliance.
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On the Change of Control Payment Date, ETE will, to the extent
lawful:
(1) accept for payment all notes or portions of notes
properly tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the
Change of Control Payment in respect of all notes or portions of
notes properly tendered; and
(3) deliver or cause to be delivered to the Trustee the
notes properly accepted together with an officers
certificate stating the aggregate principal amount of notes or
portions of notes being purchased by ETE.
The paying agent will promptly mail to each Holder of notes
properly tendered the Change of Control Payment for such notes
(or, if all the notes are then in global form, make such payment
through the facilities of DTC), and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry)
to each Holder a new note equal in principal amount to any
unpurchased portion of the notes surrendered, if any;
provided that each such new note will be in a principal
amount of $1,000 or an integral multiple thereof. Any note so
accepted for payment will cease to accrue interest on and after
the Change of Control Payment Date unless ETE defaults in making
the Change of Control Payment. ETE will publicly announce the
results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The provisions described herein that require ETE to make a
Change of Control Offer following a Change of Control Triggering
Event will be applicable regardless of whether any other
provisions of the indenture are applicable. Except as described
above with respect to a Change of Control Triggering Event, the
indenture does not contain provisions that permit the Holders of
the notes to require that ETE repurchase or redeem the notes in
the event of a takeover, recapitalization or similar transaction.
ETE will not be required to make a Change of Control Offer upon
a Change of Control Triggering Event if (1) a third party
makes the Change of Control Offer in the manner, at the times
and otherwise in compliance with the requirements set forth in
the indenture applicable to a Change of Control Offer made by
ETE and purchases all notes properly tendered and not withdrawn
under the Change of Control Offer, or (2) notice of
redemption has been given pursuant to the indenture as described
above under the caption Optional
Redemption, unless and until there is a default in payment
of the applicable redemption price.
A Change of Control Offer may be made in advance of a Change of
Control, and conditioned upon the occurrence of such Change of
Control, if a definitive agreement is in place for a Change of
Control at the time of making the Change of Control Offer. Notes
repurchased by ETE pursuant to a Change of Control Offer will
have the status of notes issued but not outstanding or will be
retired and cancelled, at ETEs option. Notes purchased by
a third party pursuant to the preceding paragraph will have the
status of notes issued and outstanding.
The occurrence of certain change of control events identified in
the Credit Agreement constitutes a default under the Credit
Agreement. The documents governing any Indebtedness of ETE may
also contain similar provisions. If a Change of Control
Triggering Event were to occur, ETE may not have sufficient
available funds to pay the Change of Control Payment for all
notes that might be delivered by Holders of notes seeking to
accept the Change of Control Offer after first satisfying its
obligations under the Credit Agreement or other agreements
relating to Indebtedness, if accelerated. The failure of ETE to
make or consummate the Change of Control Offer or pay the Change
of Control Payment when due will constitute a Default under the
indenture and will otherwise give the Trustee and the Holders of
notes the rights described under Events of
Default and Remedies. See Risk Factors
Risks relating to the notes We may not be able to
repurchase the notes upon a change of control.
The definition of Change of Control includes a phrase relating
to the sale, lease, transfer, conveyance or other disposition of
all or substantially all of the properties or assets
of ETE and its Subsidiaries taken as a whole. Although there is
a limited body of case law interpreting the phrase
substantially all, there is no precise established
definition of the phrase under applicable law. Accordingly, the
ability of a Holder of notes to require ETE to repurchase such
Holders notes as a result of a sale, lease, transfer,
conveyance or other
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disposition of less than all of the assets of ETE and its
Subsidiaries taken as a whole to another Person or group may be
uncertain.
Limitations
on Liens
ETE will not, nor will it permit any Restricted Subsidiary to,
create, assume, incur or suffer to exist any Lien (other than
any Permitted Lien) upon any Principal Property, whether owned
on the Issue Date or thereafter acquired, to secure any
Indebtedness of ETE or any other Person.
Notwithstanding the first paragraph of this covenant:
(a) ETE may, and may permit any Restricted Subsidiary to,
create, assume, incur, or suffer to exist any Lien upon any
Principal Property to secure Indebtedness; provided that
effective provisions are made whereby all of the outstanding
notes are secured equally and ratably with, or prior to, such
Indebtedness so long as such Indebtedness is so secured (except
that Liens securing Subordinated Indebtedness shall be expressly
subordinate to any Lien securing the notes to at least the same
extent such Subordinated Indebtedness is subordinate to the
notes or a Subsidiary Guarantee, as the case may be); and
(b) ETE may, and may permit any Restricted Subsidiary to,
create, assume, incur, or suffer to exist any Lien upon any
Principal Property to secure Indebtedness (including, without
limitation, Indebtedness under the Credit Agreement);
provided that the aggregate principal amount of all
Indebtedness then outstanding secured by such Lien and all
similar Liens under this clause (b), together with all
Attributable Indebtedness from Sale-Leaseback Transactions
(excluding Sale-Leaseback Transactions permitted by
clauses (1) through (3), inclusive, of the first paragraph
of the restriction on sale-leasebacks covenant described below),
does not exceed the greater of (x) $250.0 million or
(y) 10.0% of Net Tangible Assets.
Restriction
on Sale-Leasebacks
ETE will not, and will not permit any Restricted Subsidiary to,
engage in the sale or transfer by ETE or any Restricted
Subsidiary of any Principal Property to a Person (other than ETE
or a Restricted Subsidiary) and the taking back by ETE or such
Restricted Subsidiary, as the case may be, of a lease of such
Principal Property (a Sale-Leaseback
Transaction), unless:
(1) such Sale-Leaseback Transaction occurs within one year
from the date of completion of the acquisition of the Principal
Property subject thereto or the date of the completion of
construction, development or substantial repair or improvement,
or commencement of full operations on such Principal Property,
whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a
period, including renewals, of not more than three years; or
(3) ETE or such Restricted Subsidiary, within a one-year
period after such Sale-Leaseback Transaction, applies or causes
to be applied an amount not less than the Attributable
Indebtedness from such Sale-Leaseback Transaction to
(a) the prepayment, repayment, redemption, reduction or
retirement of any Indebtedness of ETE or any Restricted
Subsidiary that is not Subordinated Indebtedness, or
(b) the purchase of Principal Property used or to be used
in the ordinary course of business of ETE or the Restricted
Subsidiaries.
Notwithstanding the foregoing, ETE may, and may permit any
Subsidiary to, effect any Sale-Leaseback Transaction that is not
permitted by clauses (1) through (3), inclusive, of the
preceding paragraph, provided that the Attributable Indebtedness
from such Sale-Leaseback Transaction, together with the
aggregate principal amount of outstanding Indebtedness secured
by liens upon Principal Properties (other than Permitted Liens),
does not exceed the greater of (x) $250.0 million or
(y) 10.0% of Net Tangible Assets.
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Reports
So long as any notes are outstanding, ETE will:
(1) for as long as it is required to file information with
the SEC pursuant to the Exchange Act, file with the Trustee,
within 15 days after it is required to file the same with
the SEC, copies of the annual reports and of the information,
documents and other reports which it is required to file with
the SEC pursuant to the Exchange Act; and
(2) if it is not required to file reports with the SEC
pursuant to the Exchange Act, file with the Trustee, within
15 days after it would have been required to file with the
SEC, financial statements (and with respect to annual reports,
an auditors report by a firm of established national
reputation) and a Managements Discussion and Analysis of
Financial Condition and Results of Operations, both comparable
to what it would have been required to file with the SEC had it
been subject to the reporting requirements of the Exchange
Act; and
(3) if it is required to furnish annual or quarterly
reports to its equity holders pursuant to the Exchange Act, it
will file these reports with the Trustee.
Merger,
Consolidation or Sale of Assets
ETE may not: (1) consolidate or merge with or into another
Person (regardless of whether ETE is the surviving corporation);
or (2) directly or indirectly sell, assign, transfer,
convey or otherwise dispose of all or substantially all of the
properties or assets of ETE and its Restricted Subsidiaries
taken as a whole, in one or more related transactions, to
another Person; unless:
(1) the Person formed by or resulting from any such
consolidation or merger or to which such assets have been
transferred (the successor) is ETE or
expressly assumes by supplemental indenture all of ETEs
obligations and liabilities under the indenture and the notes;
(2) the successor is organized under the laws of the United
States, any state or the District of Columbia;
(3) immediately after giving effect to the transaction no
Default or Event of Default has occurred and is
continuing; and
(4) ETE has delivered to the Trustee an officers
certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer complies with the indenture.
The successor will be substituted for ETE in the indenture with
the same effect as if it had been an original party to the
indenture. Thereafter, the successor may exercise the rights and
powers of ETE under the indenture. If ETE conveys or transfers
all or substantially all of its assets, it will be released from
all liabilities and obligations under the indenture and under
the notes except that no such release will occur in the case of
a lease of all or substantially all of its assets.
Notwithstanding the foregoing, this Merger, Consolidation
or Sale of Assets covenant will not apply to:
(1) a merger of ETE with an Affiliate solely for the
purpose of organizing ETE in another jurisdiction within the
United States of America; or
(2) any merger or consolidation, or any sale, transfer,
assignment, conveyance, lease or other disposition of assets
between or among ETE and its Restricted Subsidiaries that are
Subsidiary Guarantors.
Events of
Default and Remedies
Each of the following is an Event of Default under the indenture
with respect to the notes of each series:
(1) default for 30 days in the payment when due of
interest on such notes;
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(2) a default in the payment of principal or premium, if
any, on such notes when due at their stated maturity, upon
redemption, upon declaration or otherwise;
(3) failure by ETE to comply with any of its agreements or
covenants described above under
Covenants Merger, Consolidation or
Sale of Assets, or in respect of its obligations to make
or consummate a Change of Control Offer as described under
Covenants Change of Control;
(4) a failure by ETE to comply with its other covenants or
agreements in the indenture applicable to such notes for
60 days after written notice of default given by the
Trustee or the Holders of at least 25% in aggregate principal
amount of the outstanding notes;
(5) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by ETE or any
of its Subsidiaries (or the payment of which is guaranteed by
ETE or any of its Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the Issue Date, if
that default (A) is caused by a failure to pay principal
of, or interest or premium, if any, on such Indebtedness prior
to the expiration of the grace period provided in such
Indebtedness on the date of such default (a Payment
Default) or (B) results in the acceleration of
such Indebtedness prior to its express maturity, and, in each
case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which
has been so accelerated, aggregates $25.0 million or more;
(6) certain events of bankruptcy, insolvency or
reorganization of ETE or any of its Significant Subsidiaries or
any group of Subsidiaries of ETE that, taken together, would
constitute a Significant Subsidiary; and
(7) except as permitted by the indenture, any Subsidiary
Guarantee by a Subsidiary Guarantor is held in any judicial
proceeding to be unenforceable or invalid or ceases for any
reason to be in full force and effect, or any Subsidiary
Guarantor, or any Person acting on behalf of any Subsidiary
Guarantor, denies or disaffirms the obligations of such
Subsidiary Guarantor under its Subsidiary Guarantee.
An Event of Default for a series of notes will not necessarily
constitute an Event of Default for any other series of debt
securities issued under the indenture, and an Event of Default
for any such other series of debt securities will not
necessarily constitute an Event of Default for any series of the
notes. Further, an event of default under other indebtedness of
ETE or its Subsidiaries will not necessarily constitute a
Default or an Event of Default for the notes. If an Event of
Default (other than an Event of Default described in
clause (6) above with respect to ETE) with respect to the
notes of either series occurs and is continuing, the Trustee by
notice to ETE, or the Holders of at least 25% in principal
amount of the outstanding notes of such series by notice to ETE
and the Trustee, may, and the Trustee at the request of such
Holders shall, declare the principal of and accrued and unpaid
interest on all the notes of such series to be due and payable.
Upon such a declaration, such principal and accrued and unpaid
interest will be due and payable immediately. The indenture
provides that if an Event of Default described in
clause (6) above occurs with respect to ETE, the principal
of and accrued and unpaid interest on the notes will become and
be immediately due and payable without any declaration of
acceleration, notice or other act on the part of the Trustee or
any Holders of notes. However, the effect of such provision may
be limited by applicable law.
The Holders of a majority in principal amount of the outstanding
notes of the applicable series may, by written notice to the
Trustee, rescind any acceleration with respect to the notes of
such series and annul its consequences if rescission would not
conflict with any judgment or decree of a court of competent
jurisdiction and all existing Events of Default with respect to
the notes of such series, other than the nonpayment of the
principal of and interest on the notes that have become due
solely by such acceleration, have been cured or waived.
Subject to the provisions of the indenture relating to the
duties of the Trustee if an Event of Default occurs and is
continuing, the Trustee will be under no obligation to exercise
any of the rights or powers under the indenture at the request
or direction of any of the Holders of notes, unless such Holders
have offered to the Trustee reasonable indemnity or security
against any cost, liability or expense. Except to enforce the
right
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to receive payment of principal or interest when due, no Holder
of notes may pursue any remedy with respect to the indenture or
the notes, unless:
(1) such Holder has previously given the Trustee notice
that an Event of Default with respect to the notes is continuing;
(2) Holders of at least 25% in principal amount of the
outstanding notes of the applicable series have requested in
writing that the Trustee pursue the remedy;
(3) such Holders have offered the Trustee reasonable
security or indemnity against any cost, liability or expense;
(4) the Trustee has not complied with such request within
60 days after the receipt of the request and the offer of
security or indemnity; and
(5) the Holders of a majority in principal amount of the
outstanding notes of the applicable series have not given the
Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such
60-day
period.
Subject to certain restrictions, the Holders of a majority in
principal amount of the outstanding notes of the applicable
series have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the
Trustee with respect to the notes of such series. The Trustee,
however, may refuse to follow any direction that conflicts with
law or the indenture or that the Trustee determines is unduly
prejudicial to the rights of any other Holder of notes or that
would involve the Trustee in personal liability.
The indenture provides that if a Default (that is, an event that
is, or after notice or the passage of time would be, an Event of
Default) with respect to the notes of a series occurs and is
continuing and is known to the Trustee, the Trustee must mail to
each Holder of such notes notice of the Default within
90 days after it occurs. Except in the case of a Default in
the payment of principal of or interest on the notes, the
Trustee may withhold such notice, but only if and so long as the
Trustee in good faith determines that withholding notice is in
the interests of the Holders of notes. In addition, ETE is
required to deliver to the Trustee, within 120 days after
the end of each fiscal year, an officers certificate as to
compliance with all covenants under the indenture and indicating
whether the signers thereof know of any Default or Event of
Default that occurred during the previous year. ETE also is
required to deliver to the Trustee, within 30 days after
the occurrence thereof, an officers certificate specifying
any Default or Event of Default, its status and what action ETE
is taking or proposes to take in respect thereof.
Amendments
and Waivers
Amendments of the indenture may be made by ETE, the Subsidiary
Guarantors, if any, and the Trustee with the written consent of
the Holders of a majority in principal amount of the debt
securities of each affected series then outstanding under the
indenture (including consents obtained in connection with a
tender offer or exchange offer for notes). However, without the
consent of each Holder of an affected note, no amendment may,
among other things:
(1) reduce the percentage in principal amount of such notes
whose Holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any such note;
(3) reduce the principal of or extend the stated maturity
of any such note;
(4) reduce the premium payable upon the redemption of any
such note as described above under Optional
Redemption; provided, however, that any purchase or
repurchase of notes, including pursuant to the covenant
described above under the caption
Covenants Change of Control;
shall not be deemed a redemption of the notes;
(5) make any such notes payable in money other than
U.S. dollars;
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(6) impair the right of any Holder of such note to receive
payment of the principal of and premium, if any, and interest on
such Holders note or to institute suit for the enforcement
of any payment on or with respect to such Holders
note; or
(7) make any change in the amendment or waiver provisions
which require the consent of each Holder of such note; or
(8) release the guarantee of any Subsidiary Guarantor other
than in accordance with the indenture or modify its guarantee in
any manner adverse to the Holders of such note.
The Holders of a majority in principal amount of the outstanding
notes of any series may waive compliance by ETE with certain
restrictive covenants on behalf of all Holders of notes of such
series, including those described under
Covenants Limitations on
Liens and Covenants
Restriction on Sale-Leasebacks. The Holders of a majority
in principal amount of the outstanding notes of any series, on
behalf of all such Holders, may waive any past or existing
Default or Event of Default with respect to the notes of such
series (including any such waiver obtained in connection with a
tender offer or exchange offer for the notes), except a Default
or Event of Default in the payment of principal, premium or
interest or in respect of a provision that under the indenture
cannot be modified or amended without the consent of the Holder
of each outstanding note affected. A waiver by the Holders of
notes of any series of compliance with a covenant, a Default or
an Event of Default will not constitute a waiver of compliance
with such covenant or such Default or Event of Default with
respect to any other series of debt securities issued under the
indenture to which such covenant, Default or Event of Default
applies.
Without the consent of any Holder, ETE, the Subsidiary
Guarantors, if any, and the Trustee may amend the indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor of the
obligations of ETE under the indenture;
(3) provide for uncertificated notes in addition to or in
place of certificated notes;
(4) establish any Subsidiary Guarantee or to reflect the
release of any Subsidiary Guarantor from obligations in respect
of its Subsidiary Guarantee, in either case, as provided in the
indenture;
(5) secure the notes or any Subsidiary Guarantee;
(6) comply with requirements of the SEC in order to effect
or maintain the qualification of the indenture under the
Trust Indenture Act;
(7) add to the covenants of ETE for the benefit of the
Holders of notes or surrender any right or power conferred upon
ETE;
(8) add any additional Events of Default with respect to
the notes;
(9) make any change that does not adversely affect the
rights under the indenture of any Holder of notes;
(10) conform the text of the indenture or the notes to any
provision of this Description of Notes to the extent that such
provision in this Description of Notes was intended to be a
verbatim recitation of a provision of the indenture, the
Subsidiary Guarantees or the notes;
(11) provide for the issuance of additional notes in
accordance with the indenture; and
(12) provide for a successor Trustee in accordance with the
provisions of the indenture.
The consent of the Holders of notes is not necessary under the
indenture or the notes to approve the particular form of any
proposed amendment. It is sufficient if such consent approves
the substance of the proposed amendment. After an amendment with
the consent of the Holders of the notes under the indenture
becomes effective, ETE is required to mail to all Holders of
notes a notice briefly describing such amendment.
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However, the failure to give such notice to all such Holders, or
any defect therein, will not impair or affect the validity of
the amendment.
Defeasance
and Discharge
ETE may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes of
any series and all obligations of the Subsidiary Guarantors
discharged with respect to their Subsidiary Guarantees
(legal defeasance) except for:
(1) the rights of Holders of outstanding notes to receive
payments in respect of the principal of or interest on such
notes when such payments are due from the trust referred to
below;
(2) ETEs obligations with respect to the notes
concerning issuing temporary notes, registration of notes,
mutilated, destroyed, lost or stolen notes and the maintenance
of an office or agency for payment and money for security
payments held in trust;
(3) the rights, powers, trusts, duties and immunities of
the trustee, and ETEs and the Subsidiary Guarantors
obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
ETE at any time may terminate its obligations under the
covenants described under Covenants
(other than Merger, Consolidation or Sale of Assets)
(covenant defeasance).
ETE may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If ETE
exercises its legal defeasance option, payment of the notes of
the applicable series may not be accelerated because of an Event
of Default. In the event covenant defeasance occurs with respect
to notes of any series in accordance with the indenture, the
Events of Default described under clauses (3), (4), (5) and (7)
under the caption Events of Default and
Remedies and the Event of Default described under
clause (6) under the caption Events of
Default and Remedies (but only with respect to
Subsidiaries of ETE), in each case, will no longer constitute an
Event of Default with respect to the notes of the applicable
series.
If ETE exercises its legal defeasance option, any security that
may have been granted with respect to the notes of the
applicable series will be released.
In order to exercise either defeasance option, ETE must
irrevocably deposit in trust (the defeasance
trust) with the Trustee money, U.S. Government
Obligations (as defined in the indenture) or a combination
thereof for the payment of principal, premium, if any, and
interest on the notes of the applicable series to redemption or
stated maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of
an opinion of counsel (subject to customary exceptions and
exclusions) to the effect that Holders of the notes will not
recognize income, gain or loss for federal income tax purposes
as a result of such defeasance and will be subject to federal
income tax on the same amounts and in the same manner and at the
same times as would have been the case if such defeasance had
not occurred. In the case of legal defeasance only, such opinion
of counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law.
In the event of any legal defeasance of a series of notes,
Holders of the notes of such series would be entitled to look
only to the trust fund for payment of principal of and any
premium and interest on their notes until maturity.
Although the amount of money and U.S. Government
Obligations on deposit with the Trustee would be intended to be
sufficient to pay amounts due on the notes at the time of their
stated maturity, if ETE exercises its covenant defeasance option
for the notes and the notes are declared due and payable because
of the occurrence of an Event of Default, such amount may not be
sufficient to pay amounts due on the notes at the time of the
acceleration resulting from such Event of Default. ETE would
remain liable for such payments, however.
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In addition, ETE may discharge all its obligations under the
indenture with respect to the notes of any series, other than
its obligation to register the transfer of and exchange notes,
provided that either:
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it delivers all outstanding notes of such series to the Trustee
for cancellation; or
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all such notes not so delivered for cancellation have either
become due and payable or will become due and payable at their
stated maturity within one year or are called for redemption or
are to be called for redemption under arrangements satisfactory
to the Trustee within one year, and in the case of this bullet
point, it has deposited with the Trustee in trust an amount of
cash sufficient to pay the entire indebtedness of such notes,
including interest to the stated maturity or applicable
redemption date.
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Book-Entry
System
We have obtained the information in this section concerning The
Depository Trust Company, or DTC, and its book-entry
systems and procedures from DTC, but we take no responsibility
for the accuracy of this information. In addition, the
description in this section reflects our understanding of the
rules and procedures of DTC as they are currently in effect. DTC
could change its rules and procedures at any time.
The notes will initially be represented by one or more fully
registered global notes. Each such global note will be deposited
with, or on behalf of, DTC or any successor thereto and
registered in the name of Cede & Co. (DTCs
nominee). You may hold your interests in the global notes
through DTC either as a participant in DTC or indirectly through
organizations which are participants in DTC.
So long as DTC or its nominee is the registered owner of the
global securities representing the notes, DTC or such nominee
will be considered the sole owner and Holder of the notes for
all purposes of the notes and the indenture. Except as provided
below, owners of beneficial interests in the notes will not be
entitled to have the notes registered in their names, will not
receive or be entitled to receive physical delivery of the notes
in definitive form and will not be considered the owners or
Holders of the notes under the indenture, including for purposes
of receiving any reports delivered by us or the Trustee pursuant
to the indenture. Accordingly, each person owning a beneficial
interest in a note must rely on the procedures of DTC or its
nominee and, if such person is not a participant, on the
procedures of the participant through which such person owns its
interest, in order to exercise any rights of a Holder of notes.
Notes in certificated form will not be issued to beneficial
owners in exchange for their beneficial interests in a global
note unless (a) DTC notifies ETE that it is unwilling or
unable to continue as depositary for the global notes and a
successor depositary is not appointed by ETE within 90 days
of such notice, (b) an Event of Default has occurred with
respect to such series and is continuing and the registrar has
received a request from DTC to issue notes in lieu of all or a
portion of the global notes of such series, or (c) ETE
determines not to have the notes represented by global notes.
The Depository Trust Company. DTC will
act as securities depositary for the notes. The notes will be
issued as fully registered notes registered in the name of
Cede & Co. DTC has advised us as follows: DTC is
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a limited-purpose trust company organized under the New York
Banking Law;
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a banking organization under the New York Banking
Law;
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a member of the Federal Reserve System;
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a clearing corporation under the New York Uniform
Commercial Code; and
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a clearing agency registered under the provisions of
Section 17A of the Securities Exchange Act of 1934.
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DTC holds securities that its direct participants deposit with
DTC. DTC facilitates the settlement among direct participants of
securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry
changes in direct participants accounts, thereby
eliminating the need for physical movement of securities
certificates.
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Direct participants of DTC include securities brokers and
dealers (including the underwriters), banks, trust companies,
clearing corporations, and certain other organizations. DTC is
owned by a number of its direct participants. Indirect access to
the DTC system is also available to securities brokers and
dealers, banks and trust companies that maintain a custodial
relationship with a direct participant.
If you are not a direct participant or an indirect participant
and you wish to purchase, sell or otherwise transfer ownership
of, or other interests in, notes, you must do so through a
direct participant or an indirect participant. DTC agrees with
and represents to DTC participants that it will administer its
book-entry system in accordance with its rules and by-laws and
requirements of law. The SEC has on file a set of the rules
applicable to DTC and its direct participants.
Purchases of notes under DTCs system must be made by or
through direct participants, which will receive a credit for the
notes on DTCs records. The ownership interest of each
beneficial owner is in turn to be recorded on the records of
direct participants and indirect participants. Beneficial owners
will not receive written confirmation from DTC of their
purchase, but beneficial owners are expected to receive written
confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the direct
participants or indirect participants through which such
beneficial owners entered into the transaction. Transfers of
ownership interests in the notes are to be accomplished by
entries made on the books of participants acting on behalf of
beneficial owners.
To facilitate subsequent transfers, all notes deposited with DTC
are registered in the name of DTCs nominee,
Cede & Co. The deposit of notes with DTC and their
registration in the name of Cede & Co. effect no
change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the notes. DTCs records
reflect only the identity of the direct participants to whose
accounts such notes are credited, which may or may not be the
beneficial owners. The participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants
and by direct participants and indirect participants to
beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in
effect from time to time.
Book-Entry Format. Under the book-entry
format, the trustee will pay interest or principal payments to
Cede & Co., as nominee of DTC. DTC will forward the
payment to the direct participants, who will then forward the
payment to the indirect participants or to you as the beneficial
owner. You may experience some delay in receiving your payments
under this system. Neither we, the trustee under the indenture
nor any paying agent has any direct responsibility or liability
for the payment of principal or interest on the notes to owners
of beneficial interests in the notes.
DTC is required to make book-entry transfers on behalf of its
direct participants and is required to receive and transmit
payments of principal, premium, if any, and interest on the
notes. Any direct participant or indirect participant with which
you have an account is similarly required to make book-entry
transfers and to receive and transmit payments with respect to
the notes on your behalf. We, the underwriters and the Trustee
under the indenture have no responsibility for any aspect of the
actions of DTC or any of its direct or indirect participants.
We, the underwriters and the Trustee under the indenture have no
responsibility or liability for any aspect of the records kept
by DTC or any of its direct or indirect participants relating to
or payments made on account of beneficial ownership interests in
the notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. We also
do not supervise these systems in any way.
The Trustee will not recognize you as a Holder under the
indenture, and you can only exercise the rights of a Holder
indirectly through DTC and its direct participants. DTC has
advised us that it will only take action regarding a note if one
or more of the direct participants to whom the note is credited
directs DTC to take such action and only in respect of the
portion of the aggregate principal amount of the notes as to
which that participant or participants has or have given that
direction. DTC can only act on behalf of its direct
participants. Your ability to pledge notes to non-direct
participants, and to take other actions, may be limited because
you will not possess a physical certificate that represents your
notes.
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Neither DTC nor Cede & Co. (nor such other DTC
nominee) will consent or vote with respect to the notes unless
authorized by a direct participant in accordance with DTCs
procedures. Under its usual procedures, DTC will mail an omnibus
proxy to us as soon as possible after the record date. The
omnibus proxy assigns Cede & Co.s consenting or
voting rights to those direct participants to whose accounts the
notes are credited on the record date (identified in a listing
attached to the omnibus proxy).
DTC has agreed to the foregoing procedures in order to
facilitate transfers of the notes among its participants.
However, DTC is under no obligation to perform or continue to
perform those procedures, and may discontinue those procedures
at any time.
Concerning
the Trustee
The indenture contains certain limitations on the right of the
Trustee, should it become our creditor, to obtain payment of
claims in certain cases, or to realize for its own account on
certain property received in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in
certain other transactions. However, if it acquires any
conflicting interest within the meaning of the
Trust Indenture Act after a Default has occurred and is
continuing, it must eliminate the conflict within 90 days,
apply to the SEC for permission to continue as Trustee or resign.
If an Event of Default occurs and is not cured or waived, the
Trustee is required to exercise such of the rights and powers
vested in it by the indenture and use the same degree of care
and skill in their exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
Subject to such provisions, the Trustee will not be under any
obligation to exercise any of its rights or powers under the
indenture at the request of any of the Holders of notes unless
they have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities it may
incur.
U.S. Bank National Association will be the Trustee under
the indenture and has been appointed by ETE as registrar and
paying agent with regard to the notes. The Trustees
address is 5555 San Felipe, Suite 1150, Houston, Texas
77056. The Trustee and its affiliates maintain commercial
banking and other relationships with ETE.
No
Personal Liability of Directors, Officers, Employees and
Partners
The directors, officers, employees and partners of ETE will not
have any personal liability for our obligations under the
indenture or the notes. Each Holder of notes, by accepting a
note, waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of the
notes.
Separateness
Each Holder of notes, by accepting a note, will be deemed to
have acknowledged and affirmed (i) the separateness of ETP
from ETE and each Restricted Subsidiary, (ii) that it has
purchased the notes from ETE in reliance upon the separateness
of ETP from ETE and each Restricted Subsidiary, (iii) that
ETP has assets and liabilities that are separate from those of
ETE and any Restricted Subsidiary, (iv) that the
obligations under the indenture and the notes have not been
guaranteed by ETP or any of its subsidiaries, and (v) that,
except as other Persons may expressly assume or guarantee the
indenture or the notes or any obligations thereunder, the
Holders shall look solely to the property and assets of ETE and
the Subsidiary Guarantors, if any, and property, if any, pledged
as collateral with respect to the indenture and the notes, for
the repayment of any amounts payable under the indenture or the
notes and for satisfaction of the obligations thereunder and
that none of ETP or any of its subsidiaries shall be personally
liable to the Holders for any amounts payable, or any other
obligation under the indenture or the notes.
Governing
Law
The indenture and the notes will be governed by the laws of the
State of New York.
S-130
Definitions
Affiliate of any specified Person means any
other Person directly or indirectly controlling or controlled by
or under direct or indirect common control with such specified
Person. For purposes of this definition, control, as
used with respect to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of
the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise. For
purposes of this definition, the terms controlling,
controlled by and under direct or indirect
common control with have correlative meanings.
Attributable Indebtedness, when used with
respect to any Sale-Leaseback Transaction, means, as at the time
of determination, the present value (discounted at the rate set
forth or implicit in the terms of the lease included in such
transaction) of the total obligations of the lessee for rental
payments (other than amounts required to be paid on account of
property taxes, maintenance, repairs, insurance, assessments,
utilities, operating and labor costs and other items that do not
constitute payments for property rights) during the remaining
term of the lease included in such Sale-Leaseback Transaction
(including any period for which such lease has been extended).
In the case of any lease that is terminable by the lessee upon
the payment of a penalty or other termination payment, such
amount shall be the lesser of the amount determined assuming
termination upon the first date such lease may be terminated (in
which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered
as required to be paid under such lease subsequent to the first
date upon which it may be so terminated) or the amount
determined assuming no such termination.
Board of Directors means:
(1) with respect to a corporation, the board of directors
of the corporation or any committee thereof duly authorized to
act on behalf of such board;
(2) with respect to a partnership, the Board of Directors
of the general partner of the partnership;
(3) with respect to a limited liability company, the
managing member or members or any controlling committee of
managers or members thereof or any board or committee serving a
similar management function; and
(4) with respect to any other Person, the individual, board
or committee of such Person serving a management function
similar to those described in clauses (1), (2) or
(3) of this definition.
Capital Stock means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any
and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock;
(3) in the case of a partnership or limited liability
company, partnership interests (whether general or limited) or
membership interests; and
(4) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses
of, or distributions of assets of, the issuing Person, but
excluding from all of the foregoing any debt securities
convertible into Capital Stock, regardless of whether such debt
securities include any right of participation with Capital Stock.
Change of Control means:
(1) any person or group of related
persons (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in
Rules 13d-3
and 13d-5
under the Exchange Act, except that such person or group shall
be deemed to have beneficial ownership of all shares
that any such person or group has the right to acquire, whether
such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total
voting power of the Voting Stock of ETE or the General Partner
S-131
(or their respective successors by merger, consolidation or
purchase of all or substantially all of their respective assets);
(2) the sale, lease, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in
one or a series of related transactions, of all or substantially
all of the assets of ETE and its Restricted Subsidiaries taken
as a whole to any person (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) other than a
Permitted Holder; or
(3) the adoption of a plan or proposal for the liquidation
or dissolution of ETE.
Change of Control Triggering Event means,
with respect to the notes of any series, the occurrence of both
a Change of Control and a Rating Decline with respect to the
notes of that series.
Credit Agreement means the Credit Agreement
dated on or about the Issue Date, among ETE, Credit Suisse AG,
Cayman Islands Branch, as Administrative Agent, and the lenders
party thereto, governing the revolving credit facility provided
by such lenders to ETE, and in each case as amended or
refinanced from time to time (including with the same or
different lenders).
Default means any event which is, or after
notice or passage of time or both would be, an Event of Default.
ETP means Energy Transfer Partners, L.P., a
Delaware limited partnership, and its successors.
ETP GP means Energy Transfer Partners GP,
L.P., a Delaware limited partnership, and its successors.
Exchange Act means the Securities Exchange
Act of 1934, as amended.
GAAP means generally accepted accounting
principles in the United States, applied on a consistent basis
and set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of
Certified Public Accountants, the opinions and pronouncements of
the Public Company Accounting Oversight Board and in the
statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity
as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
General Partner means LE GP, LLC, a Delaware
limited partnership, and its successors as general partner of
ETE.
Indebtedness means, with respect to any
Person, any obligation created or assumed by such Person for the
repayment of borrowed money or any guarantee thereof.
Investment Grade Rating means a rating equal
to or higher than:
(1) Baa3 (or the equivalent) by Moodys; or
(2) BBB− (or the equivalent) by S&P,
or, if either such entity ceases to rate the notes for
reasons outside of ETEs control, the equivalent investment
grade credit rating from any other Rating Agency.
Issue Date means, with respect to each series
of notes, the first date on which notes of the applicable series
are issued under the indenture.
Legal Holiday means a Saturday, a Sunday or a
day on which banking institutions in the City of New York or at
a place of payment are authorized by law, regulation or
executive order to remain closed.
Lien means, with respect to any asset, any
mortgage, deed of trust, lien, pledge, hypothecation, charge,
security interest or similar encumbrance in, on, or of such
asset, regardless of whether filed, recorded or otherwise
perfected under applicable law, including any conditional sale
or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction.
S-132
Moodys means Moodys Investors
Service, Inc. or any successor to the rating agency business
thereof.
Net Tangible Assets means, at any date of
determination, the total amount of assets of ETE and its
Restricted Subsidiaries (including, without limitation, any
assets consisting of equity securities or equity interests in
any other entity) after deducting therefrom:
(1) all current liabilities (excluding (A) any current
liabilities that by their terms are extendable or renewable at
the option of the obligor thereon to a time more than twelve
months after the time as of which the amount thereof is being
computed, and (B) current maturities of long-term
debt); and
(2) the value (net of any applicable reserves) of all
goodwill, trade names, trademarks, patents and other like
intangible assets;
all as prepared in accordance with GAAP and set forth, or on a
pro forma basis would be set forth, on a consolidated balance
sheet of ETE and its Restricted Subsidiaries (without inclusion
of assets or liabilities of any Subsidiaries that are not
Restricted Subsidiaries or assets or liabilities of any equity
investee) for ETEs most recently completed fiscal quarter
for which financial statements are available.
Non-Recourse Indebtedness means Indebtedness
(a) as to which neither ETE nor any of its Restricted
Subsidiaries is directly or indirectly liable (as a guarantor or
otherwise), or constitutes the lender, and (b) no default
with respect to which (including any rights that the holders
thereof may have to take enforcement action against any Person)
would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of ETE or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to
its stated maturity.
notes means the notes issued under the
indenture on the Issue Date and any additional notes issued
under the indenture after the Issue Date in accordance with the
terms of the indenture.
Permitted Holders means (a) any of Kelcy
L. Warren, Ray C. Davis, John W. McReynolds, the heirs at law of
such individuals, entities or trusts owned by or established for
the benefit of such individuals or their respective heirs at law
(such as entities or trusts established for estate planning
purposes), (b) ETP, Enterprise GP Holdings L.P. or any
other Person under the management or control of ETP or
Enterprise GP Holdings L.P. or (c) the General Partner and
entities owned solely by existing and former management
employees of the General Partner.
Permitted Liens means at any time:
(1) any Lien existing on any property prior to the
acquisition thereof by ETE or any Restricted Subsidiary or
existing on any property of any Person that becomes a Restricted
Subsidiary after the Issue Date prior to the time such Person
becomes a Restricted Subsidiary; provided that
(i) such Lien is not created in contemplation of or in
connection with such acquisition or such Person becoming a
Restricted Subsidiary, as the case may be, (ii) such Lien
shall not apply to any other property of ETE or any Restricted
Subsidiary and (iii) such Lien shall secure only those
obligations that it secures on the date of such acquisition or
the date such Person becomes a Restricted Subsidiary, as the
case may be;
(2) any Lien on any real or personal tangible property
securing Purchase Money Indebtedness incurred by ETE or any
Restricted Subsidiary;
(3) any Lien securing Indebtedness incurred in connection
with extension, renewal, refinancing, refunding or replacement
(or successive extensions, renewals, refinancing, refunding or
replacements), in whole or in part, of Indebtedness secured by
Liens referred to in clauses (1) or (2) above;
provided, however, that any such extension, renewal,
refinancing, refunding or replacement Lien shall be limited to
the property or assets (including replacements or proceeds
thereof) covered by the Lien extended, renewed, refinanced,
refunded or replaced and that the Indebtedness secured by any
such extension, renewal, refinancing, refunding or replacement
Lien shall be in an amount not greater than the amount of the
obligations secured by the Lien extended, renewed, refinanced,
refunded or replaced and any expenses of ETE or its Subsidiaries
(including any premium) incurred in connection with such
extension, renewal, refinancing, refunding or replacement;
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(4) any Lien on Capital Stock of a Project Finance
Subsidiary securing Non-Recourse Indebtedness of such Project
Finance Subsidiary; and
(5) any Lien resulting from the deposit of moneys or
evidence of indebtedness in trust for the purpose of defeasing
Indebtedness of ETE or any Restricted Subsidiary.
Person means any individual, corporation,
partnership, limited liability company, joint venture,
incorporated or unincorporated association, joint-stock company,
trust, unincorporated organization, government or any agency or
political subdivision thereof or any other entity.
Principal Property means (a) any real
property, manufacturing plant, terminal, warehouse, office
building or other physical facility, and any fixtures,
furniture, equipment or other depreciable assets owned or leased
by ETE or any Restricted Subsidiary and (b) any Capital
Stock or Indebtedness of ETP or any other Subsidiary of ETE or
any other property or right, in each case, owned by or granted
to ETE or any Restricted Subsidiary and used or held for use in
any of the principal businesses conducted by the Company or any
Restricted Subsidiaries; provided, however, that
Principal Property shall not include any property or
right that, in the opinion of the Board of Directors of ETE as
set forth in a board resolution adopted in good faith, is
immaterial to the total business conducted by ETE and the
Restricted Subsidiaries considered as one enterprise.
Project Finance Subsidiary means any special
purpose Subsidiary of ETE that (a) ETE designates as a
Project Finance Subsidiary by written notice to the
Trustee and is formed to facilitate the financing of the assets
or activities of such Subsidiary, (b) has no Indebtedness
other than Non-Recourse Indebtedness, (c) is a Person with
respect to which neither ETE nor any of its Restricted
Subsidiaries has any direct or indirect obligation (1) to
subscribe for additional Capital Stock or (2) to maintain
or preserve such Persons financial condition or to cause
such Person to achieve any specified levels of operating
results; and (d) has not guaranteed or otherwise directly
provided credit support for any Indebtedness of ETE or any of
its Restricted Subsidiaries.
Purchase Money Indebtedness of any Person
means any Indebtedness of such Person to any seller or other
Person, that is incurred to finance the acquisition,
construction, installation or improvement of any real or
personal tangible property used or useful in the business of
such Person and its Restricted Subsidiaries and that is incurred
concurrently with, or within one year following, such
acquisition, construction, installation or improvement.
Rating Agency means each of S&P and
Moodys, or if S&P or Moodys or both shall
refuse to make a rating on the notes publicly available (for any
reason other than the failure by ETE to pay the customary fees
of such agency), any nationally recognized statistical rating
agency or agencies, as the case may be, selected by ETE, which
shall be substituted for S&P or Moodys, or both, as
the case may be.
Rating Decline means, with respect to the
notes of any series and any Change of Control, the occurrence of:
(1) a decrease of one or more gradations (including
gradations within rating categories as well as between rating
categories) in the rating of the notes of such series by both
Rating Agencies; provided that the notes of such series
did not have an Investment Grade Rating from two Rating Agencies
immediately before such decrease, or (2) a decrease in the
rating of the notes of such series by both Rating Agencies, such
that the notes of such series do not have an Investment Grade
Rating from two Rating Agencies immediately after such decrease;
provided, however, that such decrease occurs on, or
within 60 days after the earlier of (a) such Change of
Control, (b) the date of public notice of the occurrence of
such Change of Control or (c) public notice of the
intention by ETE to effect such Change of Control (which period
shall be extended so long as the rating of the notes of such
series is under publicly announced consideration for downgrade
by either Rating Agency); and provided, further, that a Rating
Decline otherwise arising by virtue of a particular reduction in
rating will not be deemed to have occurred in respect of a
particular Change of Control (and thus will disregarded in
determining whether a Rating Decline has occurred for purposes
of the definition of Change of Control Triggering Event) if the
Rating Agencies making the reduction in rating do not announce
or publicly confirm or inform the Trustee in
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writing at ETEs or the Trustees request that the
reduction was the result, in whole or in part, of any event or
circumstance comprised of or arising as a result of, or in
respect of, the applicable Change of Control (regardless of
whether the applicable Change of Control has occurred at the
time of the Rating Decline).
Restricted Subsidiary means any Subsidiary of
ETE (other than Project Finance Subsidiaries and ETP and its
Subsidiaries) that owns or leases, directly or indirectly
through ownership in another Subsidiary, any Principal Property.
S&P means Standard &
Poors Ratings Services, a division of The McGraw-Hill
Companies, Inc.
SEC means the United States Securities and
Exchange Commission and any successor agency thereto.
Significant Subsidiary means any Subsidiary
that would be a significant subsidiary as defined in
Article 1,
Rule 1-02
of
Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation
is in effect on the Issue Date.
Subordinated Indebtedness means Indebtedness
of ETE or a Subsidiary Guarantor that is contractually
subordinated in right of payment, in any respect (by its terms
or the terms of any document or instrument relating thereto), to
the notes or the Subsidiary Guarantee of such Subsidiary
Guarantor, as applicable.
Subsidiary means, with respect to any Person:
(1) any corporation, association or other business entity
of which more than 50% of the total voting power of the Capital
Stock entitled (without regard to the occurrence of any
contingency and after giving effect to any voting agreement that
effectively transfers voting power) to vote in the election of
directors, managers or Trustees of the corporation, association
or other business entity is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the
other Subsidiaries of that Person (or a combination
thereof); and
(2) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners
of which are that Person or one or more Subsidiaries of that
Person (or any combination thereof).
Subsidiary Guarantee means each guarantee of
the obligations of ETE under the indenture and the notes by a
Subsidiary of ETE in accordance with the provisions of the
indenture.
Subsidiary Guarantor means each Subsidiary of
ETE that guarantees the notes pursuant to the terms of the
indenture but only so long as such Subsidiary is a guarantor
with respect to the notes on the terms provided for in the
indenture.
Voting Stock of any specified Person as of
any date means the Capital Stock of such Person is at the time
entitled to vote in the election of the Board of Directors of
such Person.
S-135
CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal
income tax considerations and, in the case of a
non-U.S. holder
(as defined below), U.S. federal estate tax considerations,
that may be relevant to the acquisition, ownership and
disposition of the notes. Except as specifically described below
(See Tax Consequences to
Non-U.S. Holders
Proposed Legislation), this discussion is based upon the
provisions of the Internal Revenue Code of 1986, as amended, or
the Code, applicable U.S. Treasury Regulations promulgated
thereunder, judicial authority and administrative
interpretations, as of the date of this document, all of which
are subject to change, possibly with retroactive effect, or are
subject to different interpretations. We cannot assure you that
the Internal Revenue Service, or IRS, will not challenge one or
more of the tax consequences described in this discussion, and
we have not obtained, nor do we intend to obtain, a ruling from
the IRS or an opinion of counsel with respect to the
U.S. federal tax consequences of acquiring, holding or
disposing of the notes.
This discussion is limited to holders who purchase the notes in
this offering for a price equal to the issue price of the notes
(i.e., the first price at which a substantial amount of the
notes is sold other than to bond houses, brokers or similar
persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers) and who hold the notes as
capital assets (generally, property held for investment). This
discussion does not address the tax considerations arising under
the laws of any foreign, state, local or other jurisdiction. In
addition, this discussion does not address all tax
considerations that may be important to a particular holder in
light of the holders circumstances, or to certain
categories of investors that may be subject to special rules,
such as:
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dealers in securities or currencies;
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traders in securities that have elected the
mark-to-market
method of accounting for their securities;
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U.S. holders (as defined below) whose functional currency
is not the U.S. dollar;
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persons holding notes as part of a hedge, straddle, conversion
or other synthetic security or integrated
transaction;
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U.S. expatriates;
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financial institutions;
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insurance companies;
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regulated investment companies;
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real estate investment trusts;
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persons subject to the alternative minimum tax;
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entities that are tax-exempt for U.S. federal income tax
purposes; and
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partnerships and other pass-through entities and holders of
interests therein.
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If any entity treated as a partnership for U.S. federal
income tax purposes holds notes, the tax treatment of a partner
generally will depend upon the status of the partner and the
activities of the partnership. If you are a partner of a
partnership acquiring the notes, you are urged to consult your
own tax advisor about the U.S. federal income tax
consequences of acquiring, holding and disposing of the notes.
Investors considering the purchase of notes are urged to
consult their own tax advisors regarding the application of the
U.S. federal income tax laws to their particular situations
as well as any tax consequences of the purchase, ownership or
disposition of the notes under U.S. federal estate or gift
tax laws under the laws of any state, local or foreign
jurisdiction or under any applicable tax treaty.
Tax
Consequences to U.S. Holders
You are a U.S. holder for purposes of this
discussion if you are a beneficial owner of a note and you are
for U.S. federal income tax purposes:
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an individual who is a U.S. citizen or U.S. resident
alien;
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a corporation, or other entity taxable as a corporation for
U.S. federal income tax purposes, that was created or
organized in or under the laws of the United States, any state
thereof or the District of Columbia;
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an estate whose income is subject to U.S. federal income
taxation regardless of its source; or
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a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have the authority to control all
substantial decisions of the trust, or that has a valid election
in effect under applicable U.S. Treasury Regulations to be
treated as a United States person.
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The following discussion assumes that you have not made
the election to include all interest that accrues on a note in
gross income on a constant yield basis (as described below under
Stated Interest and OID on the Notes).
Stated
Interest and OID on the Notes
Stated interest on the notes generally will be taxable to you as
ordinary income at the time it is received or accrued in
accordance with your regular method of accounting for United
States federal income tax purposes.
The notes may be issued with OID for U.S. federal income
tax purposes. The amount of OID (if any) is equal to the excess
of a notes stated principal amount over its issue price
(as defined above). If the notes are issued with OID, then
regardless of your method of tax accounting, you will be
required to accrue OID on a constant yield basis and include
such accruals in gross income (as ordinary income) in advance of
the receipt of cash attributable to that income. The amount of
OID allocable to an accrual period is equal to the difference
between (1) the product of the adjusted issue
price of the note at the beginning of the accrual period
and its yield to maturity (determined on the basis of a
compounding assumption that reflects the length of the accrual
period) and (2) the amount of any stated interest allocable
to the accrual period. The adjusted issue price of a
note at the beginning of any accrual period is the sum of the
issue price of the note plus the amount of OID allocable to all
prior accrual periods. The yield to maturity of a
note is the interest rate that, when used to compute the present
value of all payments to be made on the note, produces an amount
equal to the issue price of the note. Under these rules, you
will generally have to include in income increasingly greater
amounts of OID in successive accrual periods.
You may elect, subject to certain limitations, to include all
interest that accrues on a note in gross income on a constant
yield basis. For purposes of this election, interest includes
stated interest and OID. When applying the constant yield method
to a note for which this election has been made, the issue price
of a note will equal your basis in the note immediately after
its acquisition and the issue date of the note will be the date
of its acquisition by you. This election generally will apply
only to the note with respect to which it is made and may not be
revoked without IRS consent.
Certain
Additional Payments
In certain circumstances (see Description of
Notes Optional Redemption, and
Covenants Change of
Control), we may be obligated to pay amounts on the
notes that are in excess of stated interest or principal on the
notes. These potential payments may implicate the provisions of
the U.S. Treasury Regulations relating to contingent
payment debt instruments. The possibility of such excess
amounts being paid will not cause the notes to be treated as
contingent payment debt instruments if there is only a
remote chance that these contingencies will occur,
or if such contingencies are considered incidental.
We intend to take the position that the possibility that any
such contingencies will occur is remote
and/or that
such contingencies are incidental and thus the notes will not be
treated as contingent payment debt instruments. Our
determination that these contingencies are remote
and/or
incidental is binding on a holder unless such holder discloses
its contrary position to the IRS in the manner that is required
by applicable U.S. Treasury Regulations. Our determination,
however, is not binding on the IRS, and it is possible that the
IRS may take a different position, in which case a holder might
be required to accrue interest income at a higher rate than the
stated interest rate
S-137
plus any otherwise applicable OID and to treat as ordinary
interest income any gain realized on the taxable disposition of
the note.
Disposition
of the Notes
You will generally recognize capital gain or loss on the sale,
redemption, exchange, retirement or other taxable disposition of
a note. This gain or loss will equal the difference between your
adjusted tax basis in the note and the proceeds you receive
(excluding any proceeds attributable to accrued but unpaid
stated interest which will be recognized as ordinary interest
income to the extent you have not previously included such
amounts in income). The proceeds you receive will include the
amount of any cash and the fair market value of any other
property received for the note. Your adjusted tax basis in the
note will generally equal the amount you paid for the note,
increased by the amount of any OID you have previously included
in income. The gain or loss will be long-term capital gain or
loss if you held the note for more than one year at the time of
the sale, redemption, exchange, retirement or other disposition.
Long-term capital gains of individuals, estates and trusts
generally are subject to a reduced rate of U.S. federal
income tax. The deductibility of capital losses may be subject
to limitation.
Information
Reporting and Backup Withholding
Information reporting will apply to payments of interest
(including any OID) on, and the proceeds of the sale or other
disposition (including a retirement or redemption) of, notes
held by you, and backup withholding (at the applicable rate) may
apply to such payments unless you provide the appropriate
intermediary with a taxpayer identification number, certified
under penalties of perjury, as well as certain other
information. Backup withholding is not an additional tax. Any
amount withheld under the backup withholding rules is allowable
as a credit against your U.S. federal income tax liability,
if any, and a refund may be obtained if the amounts withheld
exceed your actual U.S. federal income tax liability and
you timely provide the required information or appropriate claim
form to the IRS.
Tax
Consequences to
Non-U.S.
Holders
Except as otherwise modified for U.S. federal estate tax
purposes, you are a
non-U.S. holder
for purposes of this discussion if you are a beneficial owner of
notes that is an individual, corporation, estate or trust and is
not a U.S. holder.
Interest
and OID on the Notes
Payments to you of interest (which for purposes of this
discussion, includes any OID) on the notes generally will be
exempt from withholding of U.S. federal income tax under
the portfolio interest exemption if you properly
certify as to your foreign status as described below, and:
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you do not own, actually or constructively, 10% or more of our
capital or profits interests;
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you are not a controlled foreign corporation that is
related to us (actually or constructively);
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you are not a bank whose receipt of interest on the notes is in
connection with an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of your trade or
business; and
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interest on the notes is not effectively connected with your
conduct of a U.S. trade or business.
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The portfolio interest exemption and several of the special
rules for
non-U.S. holders
described below generally apply only if you appropriately
certify as to your foreign status. You can generally meet this
certification requirement by providing a properly executed IRS
Form W-8BEN
or appropriate substitute form to us, or our paying agent. If
you hold the notes through a financial institution or other
agent acting on your behalf, you may be required to provide
appropriate certifications to the agent. Your agent will then
generally be required to provide appropriate certifications to
us or our paying agent, either directly or through other
intermediaries. Special rules apply to foreign estates and
trusts, and in certain circumstances certifications as
S-138
to foreign status of trust owners or beneficiaries may have to
be provided to us or our paying agent. In addition, special
rules apply to qualified intermediaries that enter into
withholding agreements with the IRS.
If you cannot satisfy the requirements described above, payments
of interest made to you will be subject to U.S. federal
withholding tax at a 30% rate, unless you provide us or our
paying agent with a properly executed IRS
Form W-8BEN
(or successor form) claiming an exemption from (or a reduction
of) withholding under the benefit of a tax treaty (in which
case, you generally will be required to provide a
U.S. taxpayer identification number), or the payments of
interest are effectively connected with your conduct of a trade
or business in the United States and you meet the certification
requirements described below. (See Tax
Consequences to
Non-U.S. Holders
Income or Gain Effectively Connected With a U.S. Trade or
Business.).
Disposition
of Notes
You generally will not be subject to U.S. federal income
tax on any gain realized on the sale, redemption, exchange,
retirement or other taxable disposition of a note unless:
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the gain is effectively connected with the conduct by you of a
U.S. trade or business (and, if required by an applicable
income tax treaty, is treated as attributable to a permanent
establishment maintained by you in the United States); or
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you are an individual who has been present in the United States
for 183 days or more in the taxable year of disposition and
certain other requirements are met.
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If you are a
non-U.S. holder
described in the first bullet point above, you will be subject
to tax as described below (See Tax
Consequences to
Non-U.S. Holders
Income or Gain Effectively Connected With a U.S. Trade or
Business). If you are a
non-U.S. holder
described in the second bullet point above, you generally will
be subject to a flat 30% U.S. federal income tax on the
gain derived from the sale or other disposition, which may be
offset by certain U.S. source capital losses.
Income
or Gain Effectively Connected with a U.S. Trade or
Business
If any interest (including any OID) on the notes or gain from
the sale, exchange or other taxable disposition of the notes is
effectively connected with a U.S. trade or business
conducted by you, then the income or gain will be subject to
U.S. federal income tax at regular graduated income tax
rates, unless an applicable income tax treaty provides
otherwise. Effectively connected income will not be subject to
U.S. withholding tax if you satisfy certain certification
requirements by providing to us or our paying agent a properly
executed IRS
Form W-8ECI
(or IRS
Form W-8BEN
if a treaty exemption applies) or successor form. If you are a
corporation, that portion of your earnings and profits that is
effectively connected with your U.S. trade or business may
also be subject to a branch profits tax at a 30%
rate, unless an applicable income tax treaty provides for a
lower rate.
Information
Reporting and Backup Withholding
Payments to you of interest and any OID on a note, and amounts
withheld from such payments, if any, generally will be required
to be reported to the IRS and to you.
United States backup withholding (at the applicable rate)
generally will not apply to payments to you of interest and any
OID on a note if the statement described in Tax
Consequences to
Non-U.S. Holders
Interest on the Notes is duly provided or you otherwise
establish an exemption, provided that we do not have actual
knowledge or reason to know that you are a United States person.
Payment of the proceeds of a disposition of a note (including a
retirement or redemption) effected by the U.S. office of a
U.S. or foreign broker will be subject to information
reporting requirements and backup withholding unless you
properly certify under penalties of perjury as to your foreign
status and certain other conditions are met or you otherwise
establish an exemption. Information reporting requirements and
backup withholding generally will not apply to any payment of
the proceeds of the disposition of a note effected outside the
United States by a foreign office of a broker. However, unless
such a broker has documentary evidence in its records that you
are a
non-U.S. holder
and certain other conditions are met, or you otherwise
S-139
establish an exemption, information reporting will apply to a
payment of the proceeds of a disposition of a note effected
outside the United States by a broker that is:
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a United States person;
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a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in
the United States;
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a controlled foreign corporation for U.S. federal income
tax purposes; or
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a foreign partnership that, at any time during its taxable year,
has more than 50% of its income or capital interests owned by
United States persons or is engaged in the conduct of a
U.S. trade or business.
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Backup withholding is not an additional tax. Any amount withheld
under the backup withholding rules is allowable as a credit
against your U.S. federal income tax liability, if any, and
a refund may be obtained if the amounts withheld exceed your
actual U.S. federal income tax liability and you timely
provide the required information or appropriate claim form to
the IRS.
Proposed
Legislation
Recently proposed legislation (which was passed by the House of
Representatives) would generally impose, effective for payments
made after December 31, 2012, a withholding tax of 30% on
interest income from, and the gross proceeds of a disposition
of, notes paid to certain foreign entities unless various
information reporting and due diligence requirements are
satisfied. There can be no assurance as to whether or not this
proposed legislation will be enacted, and, if it is enacted,
what form it will take or when it will be effective.
Non-U.S. Holders
are encouraged to consult their own tax advisors regarding the
possible implications of this proposed legislation on their
investment in the notes.
U.S.
Federal Estate Tax
If you are an individual and are not a resident of the United
States (as specially defined for U.S. federal estate tax
purposes) at the time of your death, the notes will not be
included in your estate for U.S. federal estate tax
purposes provided, at the time of your death, interest
(including any OID) on the notes qualifies for the portfolio
interest exemption under the rules described above without
regard to the certification requirement.
The preceding discussion of certain U.S. federal income
and estate tax considerations is for general information only
and is not tax advice. We urge each prospective investor to
consult its own tax advisor regarding the particular federal,
state, local and foreign tax consequences of acquiring, holding
and disposing of our notes, including the consequences of any
proposed change in applicable laws.
S-140
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus
supplement, we have agreed to sell to the underwriters named
below, for whom Credit Suisse Securities (USA) LLC, Morgan
Stanley & Co. Incorporated, Wells Fargo Securities,
LLC, Banc of America Securities LLC and UBS Securities LLC are
acting as representatives, the principal amount of notes
indicated in the following table.
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Principal
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Principal
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Amount of
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Amount of
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Underwriters
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2017 Notes
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2020 Notes
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Credit Suisse Securities (USA) LLC
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Morgan Stanley & Co. Incorporated
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Wells Fargo Securities, LLC
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Banc of America Securities LLC
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UBS Securities LLC
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BNP Paribas Securities Corp.
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Deutsche Bank Securities Inc.
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SunTrust Robinson Humphrey, Inc.
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Total
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$
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$
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The underwriting agreement provides that the underwriters are
obligated to purchase all of the notes if any are purchased. The
underwriting agreement also provides that, if an underwriter
defaults on its purchase commitment, the purchase commitments of
non-defaulting underwriters may be increased or, under certain
circumstances, the offering may be terminated.
Notes sold by the underwriters to the public will initially be
offered at the public offering price set forth on the cover page
of this prospectus supplement. Any notes sold by the
underwriters to securities dealers may be sold at a discount
from the public offering price of up
to % of the principal amount of the
2017 notes and % of the principal
amount of the 2020 notes. The underwriters may allow, and any
such dealer may reallow, a concession not in excess
of % of the principal amount of the
2017 notes and % of the principal
amount of the 2020 notes to certain other dealers. After the
initial offering of the notes to the public, the underwriters
may change the offering price and other selling terms.
We intend to use approximately 6.5% of the net proceeds from the
sale of the notes to repay indebtedness owed by us to the
underwriters or their affiliates.
We have agreed to indemnify the underwriters against
liabilities, including liabilities under the Securities Act of
1933, as amended, or to contribute to payments which they may be
required to make in that respect.
The notes are new issues of securities for which there currently
is no established trading market, and the notes will not be
listed on any national securities exchange. The underwriters
have advised us that they intend to make a market in the notes
as permitted by applicable law. They are not obligated, however,
to make a market in the notes and any market-making may be
discontinued at any time at their sole discretion and without
notice. Accordingly, no assurance can be given as to the
development or liquidity of any market for the notes.
In connection with the offering, the underwriters may purchase
and sell notes in the open market. These transactions may
include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of notes than it is
required to purchase in the offering. Stabilizing transactions
consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market prices of the
notes while the offering is in progress. These activities by the
underwriters may stabilize, maintain or otherwise affect the
market prices of the notes. As a result, the prices of the notes
may be higher than the prices that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions
may be effected in the over-the-counter market or otherwise.
We estimate that the total expenses of this offering to be paid
by us, excluding underwriting discounts, will be approximately
$300,000.
In the ordinary course of its business, the underwriters and
their affiliates have engaged, and may in the future engage, in
commercial banking
and/or
investment banking transactions with us and our affiliates for
which they received or will receive customary fees and expenses.
In particular, Credit Suisse Securities (USA)
S-141
LLC is a joint lead arranger and book runner for our new
revolving credit facility and is an affiliate of the
administrative agent under our new revolving credit facility,
and Wells Fargo Securities, LLC and UBS Securities LLC have
acted as lead arrangers and book runners for our existing term
loan facility and Wells Fargo Securities, LLC is an affiliate of
the administrative agent under the existing term loan facility.
Additionally, the underwriters, other than Morgan
Stanley & Co. Incorporated, or their affiliates are
lenders and agents under certain of our credit facilities for
which they receive interest and fees as provided in the credit
agreements related to these facilities. We will use the net
proceeds of the offering of the notes to repay outstanding loans
and accrued interest under our existing revolving credit and
term loan facilities.
In the ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for
the accounts of their customers and may at any time hold long
and short positions in such securities and instruments. Such
investment and securities activities may involve securities and
instruments of the issuer.
In relation to each Member State of the European Economic Area
that has implemented the Prospectus Directive (each, a
Relevant Member State), each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State (the Relevant Implementation
Date) it has not made and will not make an offer of notes
to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the notes that has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive,
except that it may, with effect from and including the Relevant
Implementation Date, make an offer of notes to the public in
that Relevant Member State at any time:
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts; or
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in any other circumstances which do not require the publication
by us of a prospectus pursuant to Article 3 of the
Prospectus Directive.
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For the purposes of this provision, the expression an
offer of notes to the public in relation to any
notes in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the notes to be offered so as to enable an
investor to decide to purchase or subscribe the notes, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Each underwriter has represented and agreed that:
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(A) it is a person whose ordinary activities involve it in
acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of its business and
(B) it has not offered or sold and will not offer or sell
the notes other than to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of
investments (as principal or as agent) for the purposes of their
businesses or who it is reasonable to expect will acquire, hold,
manage or dispose of investments (as principal or agent) for the
purposes of their businesses where the issue of the notes would
otherwise constitute a contravention of Section 19 of the
Financial Services and Markets Act 2000 (the FSMA)
by the Partnership;
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it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection
with the issue or sale of the notes in circumstances in which
Section 21(1) of the FSMA does not apply to us; and
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it has complied and will comply with all applicable provisions
of the FSMA with respect to anything done by it in relation to
the notes in, from or otherwise involving the United Kingdom.
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S-142
LEGAL
MATTERS
The validity of the notes in this offering will be passed upon
for us by Vinson & Elkins L.L.P., Houston, Texas.
Certain legal matters will be passed upon for the underwriters
by Andrews Kurth LLP, Houston, Texas.
EXPERTS
The consolidated financial statements and managements
assessment of the effectiveness of internal control over
financial reporting of Energy Transfer Equity, L.P. and the
consolidated balance sheet of LE GP, LLC, all incorporated by
reference in this prospectus supplement, have been so
incorporated by reference in reliance upon the reports of Grant
Thornton LLP, independent registered public accountants, upon
the authority of said firm as experts in giving said reports.
S-143
APPENDIX A
GLOSSARY OF TERMS
The following is a list of certain acronyms and terms generally
used in the energy industry and throughout this prospectus
supplement:
/d per day
Btu British thermal unit, an energy measurement
Capacity Capacity of a pipeline, processing plant or
storage facility refers to the maximum capacity under normal
operating conditions and, with respect to pipeline
transportation capacity, is subject to multiple factors
(including natural gas injections and withdrawals at various
delivery points along the pipeline and the utilization of
compression) which may reduce the throughput capacity from
specified capacity levels.
Dth Million British thermal units
(dekatherm). A therm factor is used by gas companies
to convert the volume of gas used to its heat equivalent, and
thus calculate the actual energy used.
Mcf thousand cubic feet
MMBtu million British thermal unit
MMcf million cubic feet
Bcf billion cubic feet
NGL natural gas liquid, such as propane, butane and
natural gasoline
Tcf trillion cubic feet
LIBOR London Interbank Offered Rate
NYMEX New York Mercantile Exchange
Reservoir A porous and permeable underground
formation containing a natural accumulation of producible
natural gas
and/or oil
that is confined by impermeable rock or water barriers and is
separate from other reservoirs.
A-1
Prospectus
Energy Transfer Equity,
L.P.
Debt Securities
We may offer and sell debt securities described in this
prospectus from time to time in one or more classes or series
and in amounts, at prices and on terms to be determined by
market conditions at the time of our offerings.
We may offer and sell these debt securities to or through one or
more underwriters, dealers and agents, or directly to
purchasers, on a continuous or delayed basis. This prospectus
describes the general terms of these debt securities and the
general manner in which we will offer the debt securities. The
specific terms of any debt securities we offer will be included
in a supplement to this prospectus. The prospectus supplement
will also describe the specific manner in which we will offer
the debt securities.
Investing in our debt securities involves risks. You should
carefully consider the risk factors described under Risk
Factors beginning on page 4 of this prospectus before
you make an investment in our debt securities.
We will provide information in the prospectus supplement for the
trading market, if any, for any debt securities we may offer.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is January 20, 2010.
Table of
Contents
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In making your investment decision, you should rely only on
the information contained or incorporated by reference in this
prospectus. We have not authorized anyone to provide you with
any other information. If anyone provides you with different or
inconsistent information, you should not rely on it.
You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the
front cover of this prospectus. You should not assume that the
information contained in the documents incorporated by reference
in this 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.
ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission, or SEC, using
a shelf registration process. Under this shelf
registration process, we may offer and sell the debt securities
described in this prospectus in one or more offerings. This
prospectus generally describes Energy Transfer Equity, L.P. and
the debt securities. Each time we sell securities with this
prospectus, we will provide you with a prospectus supplement
that will contain specific information about the terms of that
offering. The prospectus supplement may also add to, update or
change information in this prospectus. Before you invest in our
securities, you should carefully read this prospectus and any
prospectus supplement and the additional information described
under the heading Where You Can Find More
Information. To the extent information in this prospectus
is inconsistent with information contained in a prospectus
supplement, you should rely on the information in the prospectus
supplement. You should read both this prospectus and any
prospectus supplement, together with additional information
described under the heading Where You Can Find More
Information, and any additional information you may need
to make your investment decision.
All references in this prospectus to we,
us, Energy Transfer Equity and
our refer to Energy Transfer Equity, L.P. and its
subsidiaries, Energy Transfer Partners, L.L.C. and Energy
Transfer Partners GP, L.P. All references in this prospectus to
our general partner refer to LE GP, LLC. All
references in this prospectus to Energy Transfer Partners
GP or ETP GP refer to Energy Transfer Partners
GP, L.P. All references in this prospectus to Energy
Transfer Partners or ETP refer to Energy
Transfer Partners, L.P. and its wholly owned subsidiaries and
predecessors.
ENERGY
TRANSFER EQUITY, L.P.
We are a publicly traded limited partnership. Our common units
are publicly traded on the New York Stock Exchange
(NYSE) under the ticker symbol ETE. We
were formed in September 2002 and completed our initial public
offering of 24,150,000 common units in February 2006. Our only
cash generating assets are our direct and indirect investments
in limited partner and general partner interests in our
subsidiary, Energy Transfer Partners, L.P. Our direct and
indirect ownership of ETP consists of approximately
62.5 million ETP common units, the general partner interest
of ETP and 100% of the incentive distribution rights of ETP. We
own the general partner interests and incentive distribution
rights of ETP through Energy Transfer Partners GP, L.P.,
ETPs general partner and one of our subsidiaries.
Our principal executive offices are located at 3738 Oak Lawn
Avenue, Dallas, Texas 75219, and our telephone number at that
location is
(214) 981-0700.
ENERGY
TRANSFER PARTNERS, L.P.
ETP is a publicly traded limited partnership. ETPs common
units are publicly traded on the NYSE under the ticker symbol
ETP. ETP owns and operates a diversified portfolio
of energy assets. ETPs natural gas operations include
intrastate natural gas gathering and transportation pipelines,
an interstate pipeline, natural gas treating and processing
assets located in Texas, New Mexico, Arizona, Louisiana, Utah
and Colorado, and three natural gas storage facilities located
in Texas. These assets include more than 17,500 miles of
pipeline in service. ETP also has a 50% interest in joint
ventures with approximately 500 miles of interstate
pipeline in service. ETPs intrastate and interstate
pipeline systems transport natural gas from several significant
natural gas producing areas, including the Barnett Shale in the
Fort Worth Basin in north Texas, the Bossier Sands in east
Texas, the Permian Basin in west Texas and New Mexico, the
San Juan Basin in New Mexico and other producing areas in
south Texas and central Texas. ETPs gathering and
processing operations are conducted in many of these same
producing areas as well as in the Piceance and Uinta Basins in
Colorado and Utah. ETP is also one of the three largest retail
marketers of propane in the United States, serving more than one
million customers across the country.
1
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus and the documents we incorporate by reference
contain various forward-looking statements and information 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, 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 and
financial condition are:
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the ability of our subsidiary, ETP, to make cash distributions
to us, which is dependent on the results of operations, cash
flows and financial condition of ETP;
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the actual amount of cash distributions by ETP to us, which is
affected by the amount, if any, of cash reserves established by
the Board of Directors of the general partner of ETP and is
outside of our control;
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the amount of natural gas transported on ETPs pipelines
and gathering systems;
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the level of throughput in ETPs natural gas processing and
treating facilities;
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the fees ETP charges and the margins it realizes for its
gathering, treating, processing, storage and transportation
services;
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the prices and market demand for, and the relationship between,
natural gas and natural gas liquids, or NGLs;
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energy prices generally;
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the prices of natural gas and propane compared to the price of
alternative and competing fuels;
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the general level of petroleum product demand and the
availability and price of propane supplies;
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the level of domestic oil, propane and natural gas production;
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the availability of imported oil and natural gas;
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the ability to obtain adequate supplies of propane for retail
sale in the event of an interruption in supply or transportation
and the availability of capacity to transport propane to market
areas;
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actions taken by foreign oil and gas producing nations;
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the political and economic stability of petroleum producing
nations;
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the effect of weather conditions on demand for oil, natural gas
and propane;
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availability of local, intrastate and interstate transportation
systems;
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the continued ability to find and contract for new sources of
natural gas supply;
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availability and marketing of competitive fuels;
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the impact of energy conservation efforts;
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energy efficiencies and technological trends;
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governmental regulation and taxation;
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changes to, and the application of, regulation of tariff rates
and operational requirements related to ETPs interstate
and intrastate pipelines;
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hazards or operating risks incidental to the gathering,
treating, processing and transporting of natural gas and NGLs or
to the transporting, storing and distributing of propane that
may not be fully covered by insurance;
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the maturity of the propane industry and competition from other
propane distributors;
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competition from other midstream companies, interstate pipeline
companies and propane distribution companies;
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loss of key personnel;
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loss of key natural gas producers or the providers of
fractionation services;
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reductions in the capacity or allocations of third-party
pipelines that connect with ETPs pipelines and facilities;
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the effectiveness of risk-management policies and procedures and
the ability of ETPs liquids marketing counterparties to
satisfy their financial commitments;
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the nonpayment or nonperformance by ETPs customers;
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regulatory, environmental, political and legal uncertainties
that may affect the timing and cost of ETPs internal
growth projects, such as ETPs construction of additional
pipeline systems;
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risks associated with the construction of new pipelines and
treating and processing facilities or additions to ETPs
existing pipelines and facilities, including difficulties in
obtaining permits and
rights-of-way
or other regulatory approvals and the performance by third-party
contractors;
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the availability and cost of capital and ETPs ability to
access certain capital sources;
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the further deterioration of the credit and capital markets;
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the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to ETPs
financial results and to successfully integrate acquired
businesses;
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changes in laws and regulations to which we are subject,
including tax, environmental, transportation and employment
regulations or new interpretations by regulatory agencies
concerning such laws and regulations; and
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the costs and effects of legal and administrative proceedings.
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You should not put undue reliance on any forward-looking
statements. When considering forward-looking statements, please
review the risk factors described under Risk Factors
in this prospectus.
3
RISK
FACTORS
The nature of our business activities subjects us to certain
hazards and risks. You should carefully consider the risk
factors and all of the other information included in, or
incorporated by reference into, this prospectus or any
prospectus supplement, including those included in our most
recent Annual Report on
Form 10-K
and, if applicable, in our Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
in evaluating an investment in our securities. If any of these
risks were to occur, our business, financial condition, or
results of operations could be adversely affected. In that case,
the trading price of our debt securities could decline and you
could lose all or part of your investment. When we offer and
sell any securities pursuant to a prospectus supplement, we may
include additional risk factors relevant to those securities in
the prospectus supplement.
USE OF
PROCEEDS
Any specific use of the net proceeds of an offering of
securities will be determined at the time of the offering and
will be described in a prospectus supplement.
RATIO OF
EARNINGS TO FIXED CHARGES
The table below sets forth our ratio of earnings to fixed
charges for the periods indicated on a consolidated historical
basis. For purposes of determining the ratio of earnings to
fixed charges, earnings are defined as pre-tax income from
continuing operations before adjustment for income or loss from
equity investees, plus fixed charges, amortization of
capitalized interest, and distributed income from equity
investees, minus interest capitalized. Fixed charges consist of
net interest expense (inclusive of credit facility commitment
fees) on all indebtedness, capitalized interest, the
amortization of deferred financing costs, and interest
associated with operating leases, if any.
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Nine Months
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Year
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Four Months
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Ended
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Ended
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Ended
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September 30,
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December 31,
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December 31,
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Year Ended August 31,
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2009
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2008
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2007(1)
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2007
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2006
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2005
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2004
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Ratio of earnings to fixed charges
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2.21
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2.74
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2.58
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2.75
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3.55
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2.98
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12.44
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(1) |
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In November 2007, we changed our fiscal year end from a year
ending August 31 to a year ending December 31. Accordingly,
the four months ended December 31, 2007 is treated as a
transition period. |
4
DESCRIPTION
OF DEBT SECURITIES
Energy Transfer Equity, L.P. may issue senior debt securities
under an indenture among Energy Transfer Equity, L.P., as
issuer, the Subsidiary Guarantors, if any, and a trustee that we
will name in the related prospectus supplement. We refer to this
indenture as the indenture. The debt securities will
be governed by the provisions of the indenture and those made
part of the indenture by reference to the Trust Indenture
Act.
We have summarized material provisions of the indenture and the
debt securities below. This summary is not complete. We have
filed the form of indenture with the SEC as exhibits to the
registration statement, and you should read the indenture for
provisions that may be important to you.
References in this Description of Debt Securities to
we, us and our mean Energy
Transfer Equity, L.P., and not any of our subsidiaries.
Provisions
Applicable to the Indenture
Except as may be provided in a prospectus supplement relating to
an issuance of debt securities, the indenture does not limit the
amount of debt securities that may be issued under any
indenture, and does not limit the amount of other unsecured debt
or securities that we may issue. We may issue debt securities
under the indenture from time to time in one or more series,
each in an amount authorized prior to issuance.
Except as may be provided in a prospectus supplement relating to
an issuance of debt securities, the indenture does not contain
any covenants or other provisions designed to protect holders of
the debt securities in the event we participate in a highly
leveraged transaction or upon a change of control. Except as may
be provided in a prospectus supplement relating to an issuance
of debt securities, the indenture also does not contain
provisions that give holders the right to require us to
repurchase their securities in the event of a decline in our
credit ratings for any reason, including as a result of a
takeover, recapitalization or similar restructuring or otherwise.
Terms. We will prepare a prospectus supplement
and either a supplemental indenture, or authorizing resolutions
of the board of directors of our general partner, accompanied by
an officers certificate, relating to any series of debt
securities that we offer, which will include specific terms
relating to some or all of the following:
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the form and title of the debt securities of that series;
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the total principal amount of the debt securities of that series;
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whether the debt securities will be issued in individual
certificates to each holder or in the form of temporary or
permanent global securities held by a depositary on behalf of
holders;
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the date or dates on which the principal of and any premium on
the debt securities of that series will be payable;
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any interest rate which the debt securities of that series will
bear, the date from which interest will accrue, interest payment
dates and record dates for interest payments;
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any right to extend or defer the interest payment periods and
the duration of the extension;
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whether and under what circumstances any additional amounts with
respect to the debt securities will be payable;
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whether debt securities are entitled to the benefits of any
guarantee of any Subsidiary Guarantor;
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the place or places where payments on the debt securities of
that series will be payable;
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any provisions for optional redemption or early repayment;
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any provisions that would require the redemption, purchase or
repayment of debt securities;
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the denominations in which the debt securities will be issued;
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whether payments on the debt securities will be payable in
foreign currency or currency units or another form and whether
payments will be payable by reference to any index or formula;
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the portion of the principal amount of debt securities that will
be payable if the maturity is accelerated, if other than the
entire principal amount;
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any additional means of defeasance of the debt securities, any
additional conditions or limitations to defeasance of the debt
securities or any changes to those conditions or limitations;
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any changes or additions to the events of default or covenants
described in this prospectus;
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any restrictions or other provisions relating to the transfer or
exchange of debt securities;
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any terms for the conversion or exchange of the debt securities
for our other securities or securities of any other
entity; and
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any other terms of the debt securities of that series.
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This description of debt securities will be deemed modified,
amended or supplemented by any description of any series of debt
securities set forth in a prospectus supplement related to that
series.
We may sell the debt securities at a discount, which may be
substantial, below their stated principal amount. These debt
securities may bear no interest or interest at a rate that at
the time of issuance is below market rates. If we sell these
debt securities, we will describe in the prospectus supplement
any material United States federal income tax consequences and
other special considerations.
If we sell any of the debt securities for any foreign currency
or currency unit or if payments on the debt securities are
payable in any foreign currency or currency unit, we will
describe in the prospectus supplement the restrictions,
elections, tax consequences, specific terms and other
information relating to those debt securities and the foreign
currency or currency unit.
Events of Default. We will describe in the
prospectus supplement the terms events of default with respect
to a series of debt securities and all provisions relating
thereto.
Modification and Waiver. The indenture may be
amended or supplemented if the holders of a majority in
principal amount of the outstanding debt securities of all
series issued under the indenture that are affected by the
amendment or supplement (acting as one class) consent to it. We
will describe in the prospectus supplement the terms that may
not be modified without the consent of the holder of each debt
security affected with respect to a series of debt securities.
Defeasance. When we use the term defeasance,
we mean discharge from some or all of our obligations under the
indenture. We will describe in the prospectus supplement the
provisions applicable to defeasance with respect to a series of
debt securities.
Governing Law. New York law will govern the
indenture and the debt securities.
Trustee. We may appoint a separate trustee for
any series of debt securities. We use the term
trustee to refer to the trustee appointed with
respect to any such series of debt securities. We may maintain
banking and other commercial relationships with the trustee and
its affiliates in the ordinary course of business, and the
trustee may own debt securities.
Form, Exchange, Registration and Transfer. The
debt securities will be issued in registered form, without
interest coupons. There will be no service charge for any
registration of transfer or exchange of the debt securities.
However, payment of any transfer tax or similar governmental
charge payable for that registration may be required.
Debt securities of any series will be exchangeable for other
debt securities of the same series, the same total principal
amount and the same terms but in different authorized
denominations in accordance with the applicable indenture.
Holders may present debt securities for registration of transfer
at the office of the security registrar or any transfer agent we
designate. The security registrar or transfer agent will effect
the transfer or exchange if its requirements and the
requirements of the applicable indenture are met.
6
The trustee will be appointed as security registrar for the debt
securities. If a prospectus supplement refers to any transfer
agents we initially designate, we may at any time rescind that
designation or approve a change in the location through which
any transfer agent acts. We are required to maintain an office
or agency for transfers and exchanges in each place of payment.
We may at any time designate additional transfer agents for any
series of debt securities.
In the case of any redemption, we will not be required to
register the transfer or exchange of:
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any debt security during a period beginning 15 business days
prior to the mailing of the relevant notice of redemption and
ending on the close of business on the day of mailing of such
notice; or
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any debt security that has been called for redemption in whole
or in part, except the unredeemed portion of any debt security
being redeemed in part.
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Payment and Paying Agents. Unless we inform
you otherwise in a prospectus supplement, payments on the debt
securities will be made in U.S. dollars at the office of
the trustee and any paying agent. At our option, however,
payments may be made by wire transfer for global debt securities
or by check mailed to the address of the person entitled to the
payment as it appears in the security register. Unless we inform
you otherwise in a prospectus supplement, interest payments may
be made to the person in whose name the debt security is
registered at the close of business on the record date for the
interest payment.
Unless we inform you otherwise in a prospectus supplement, the
trustee under the indenture will be designated as the paying
agent for payments on debt securities issued under the
indenture. We may at any time designate additional paying agents
or rescind the designation of any paying agent or approve a
change in the office through which any paying agent acts.
If the principal of or any premium or interest on debt
securities of a series is payable on a day that is not a
business day, the payment will be made on the following business
day. For these purposes, unless we inform you otherwise in a
prospectus supplement, a business day is any day
that is not a Saturday, a Sunday or a day on which banking
institutions in New York, New York or a place of payment on the
debt securities of that series is authorized or obligated by
law, regulation or executive order to remain closed.
Subject to the requirements of any applicable abandoned property
laws, the trustee and paying agent will pay to us upon written
request any money held by them for payments on the debt
securities that remains unclaimed for two years after the date
upon which that payment has become due. After payment to us,
holders entitled to the money must look to us for payment. In
that case, all liability of the trustee or paying agent with
respect to that money will cease.
Book-Entry Debt Securities. The debt
securities of a series may be issued in the form of one or more
global debt securities that would be deposited with a depositary
or its nominee identified in the prospectus supplement. Global
debt securities may be issued in either temporary or permanent
form. We will describe in the prospectus supplement the terms of
any depositary arrangement and the rights and limitations of
owners of beneficial interests in any global debt security.
7
PLAN OF
DISTRIBUTION
Under this prospectus, we intend to offer our securities to the
public through underwriters or directly to investors.
We will fix a price or prices of our securities at negotiated
prices.
We may change the price of the securities offered from time to
time.
To the extent required, the names of the specific managing
underwriter or underwriters, if any, as well as other important
information, will be set forth in prospectus supplements. In
that event, the discounts and commissions we will allow or pay
to the underwriters, if any, and the discounts and commissions
the underwriters may allow or pay to dealers or agents, if any,
will be set forth in, or may be calculated from, the prospectus
supplements. Any underwriters, brokers, dealers and agents who
participate in any sale of the securities may also engage in
transactions with, or perform services for, us or our affiliates
in the ordinary course of their businesses. We may indemnify
underwriters, brokers, dealers and agents against specific
liabilities, including liabilities under the Securities Act of
1933.
To the extent required, this prospectus may be amended or
supplemented from time to time to describe a specific plan of
distribution.
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LEGAL
MATTERS
Vinson & Elkins L.L.P., Houston, Texas, will pass upon
the validity of the securities offered in this registration
statement. If certain legal matters in connection with an
offering of the securities made by this prospectus and a related
prospectus supplement are passed upon by counsel for the
underwriters of such offering, that counsel will be named in the
applicable prospectus supplement related to that offering.
EXPERTS
The consolidated financial statements and managements
assessment of the effectiveness of internal control over
financial reporting of Energy Transfer Equity, L.P. and the
consolidated balance sheet of LE GP, LLC, all incorporated by
reference in this prospectus, have been so incorporated by
reference in reliance upon the reports of Grant Thornton LLP,
independent registered public accountants, upon the authority of
said firm as experts in giving said reports.
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WHERE YOU
CAN FIND MORE INFORMATION
This prospectus, including any documents incorporated herein by
reference, constitutes a part of a registration statement on
Form S-3
that we filed with the SEC under the Securities Act. This
prospectus does not contain all the information set forth in the
registration statement. You should refer to the registration
statement and its related exhibits and schedules, and the
documents incorporated herein by reference, for further
information about our company and the securities offered in this
prospectus. Statements contained in this prospectus concerning
the provisions of any document are not necessarily complete and,
in each instance, reference is made to the copy of that document
filed as an exhibit to the registration statement or otherwise
filed with the SEC, and each such statement is qualified by this
reference. The registration statement and its exhibits and
schedules, and the documents incorporated herein by reference,
are on file at the offices of the SEC and may be inspected
without charge.
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 SECs 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 website 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,
our 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 and does not
constitute a part of this prospectus.
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference in this 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, and later information that we
file with the SEC automatically will update and supersede this
information. We incorporate by reference the documents listed
below and any future filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act,
excluding any information in those documents that is deemed by
the rules of the SEC to be furnished not filed, until we close
this offering:
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our Annual Report on
Form 10-K
for the year ended December 31, 2008;
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our Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2009, June 30, 2009
and September 30, 2009; and
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our Current Reports on
Form 8-K
filed January 26, 2009, March 18, 2009, July 29,
2009, October 28, 2009, December 23, 2009 and
January 20, 2010.
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You may request a copy of these filings, which we will provide
to you at no cost, by writing or telephoning us at the following
address and telephone number:
Energy Transfer Equity, L.P.
3738 Oak Lawn Avenue
Dallas, Texas 75219
Attention: Sonia Aubé
Telephone:
(214) 981-0700
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