Form S-1
Table of Contents
Index to Financial Statements

As Filed with the Securities and Exchange Commission on September 2, 2005

Registration No. 333-          


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 


 

Energy Transfer Equity, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware   4922   30-0108820

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 


 

Energy Transfer Equity, L.P.

2828 Woodside Street

Dallas, Texas 75204

(214) 981-0700

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

John W. McReynolds

2828 Woodside Street

Dallas, Texas 75204

(214) 981-0700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


 

Copies to:

 

Thomas P. Mason   G. Michael O’Leary

Vinson & Elkins L.L.P.

1001 Fannin, Suite 2300

Houston, Texas 77002

(713) 758-2222

 

Gislar R. Donnenberg

Andrews Kurth LLP

600 Travis, Suite 4200

Houston, Texas 77002

(713) 220-4200

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.  ¨

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

 

CALCULATION OF REGISTRATION FEE


Title of each class of

Securities to be Registered

  

Proposed Maximum

Aggregate Offering Price

   

Amount of

Registration Fee

Common Units representing limited partner interests

   $ 345,000,000 (1)(2)   $ 40,606.50

(1)   Includes common units issuable upon exercise of the underwriters’ over-allotment option.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



Table of Contents
Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS

   Subject to completion, dated September 2, 2005.     

 

LOGO

 

Energy Transfer Equity, L.P.

 

15,000,000 Common Units

Representing Limited Partner Interests

 


 

This is an initial public offering of our common units. We are offering a total of 15,000,000 common units. We expect the initial public offering price of these common units to be between $             and $             per common unit.

 

We own the 2% general partner interest, 50% of the incentive distribution rights and approximately 33% of the outstanding common units of Energy Transfer Partners, L.P. (“ETP”). ETP is a rapidly-growing publicly traded limited partnership engaged in the natural gas midstream, transportation and storage business, with operations in Texas and Louisiana, and in the retail propane marketing business, with operations in 34 states.

 

Before this offering, there has been no public market for our common units. We intend to list our common units on the New York Stock Exchange under the symbol “ETE.”

 


 

Investing in our common units involves risks. See “ Risk Factors” beginning on page 23.

 

These risks include the following:

 

    Our cash flow will initially consist exclusively of distributions from ETP.

 

    In the future, we may not have sufficient cash to pay distributions at our estimated initial quarterly distribution level or to increase distributions.

 

    Our unitholders do not elect our general partner or vote on our general partner’s officers or directors. Following the completion of this offering, affiliates of our general partner will own 86.6% of our common units on a fully diluted basis, a sufficient number to block any attempt to remove our general partner.

 

    You will experience immediate and substantial dilution of $             per common unit.

 

    Conflicts of interest exist and may arise among us, our general partner, ETP and any existing or future affiliated entities.

 

    If ETP is unable to complete acquisitions or construct pipeline extensions on economically acceptable terms or has difficulty integrating newly acquired assets or businesses, our future cash flows could be lower than expected.

 

    If we or ETP were to be become subject to entity-level taxation for federal or state tax purposes, then our cash available for distribution to you would be substantially reduced.

 

    Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

 


 

     Per Common Unit

   Total

Initial Public Offering Price

   $                     $                     

Underwriting Discount

   $                     $                     

Proceeds to Energy Transfer Equity (before expenses)

   $                     $                     

 

We have granted the underwriters a 30-day option to purchase up to an additional 2,250,000 common units on the same terms and conditions as set forth in this prospectus to cover over-allotments of common units, if any.

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the common units on                     , 2005.

 


 

UBS Investment Bank

       Wachovia Securities    Credit Suisse First Boston

 

A.G. Edwards

RBC Capital Markets

Oppenheimer & Co.

Raymond James

Stephens Inc.

 

                    , 2005


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

     Page

PROSPECTUS SUMMARY

   1

Energy Transfer Equity, L.P.

   1

Our Interests in ETP

   1

Our Business Strategy

   3

Our Structure

   5

Our Management

   7

Our Principal Executive Offices

   7

Energy Transfer Partners, L.P.

   7

Comparison of Rights of Holders of Our Common Units and ETP’s Common Units

   8

Summary of Risk Factors

   10

Risks Inherent in an Investment in Us

   10

Risks Related to ETP’s Business

   10

Risks Related to Conflicts of Interest

   11

Tax Risks to Our Unitholders

   11

The Offering

   12

Summary of Conflicts of Interest and Fiduciary Duties

   15

Summary Historical and Pro Forma Financial and Operating Data

   16

FORWARD-LOOKING STATEMENTS

   21

RISK FACTORS

   23

Risks Inherent in an Investment in Us

   23

Risks Related to Energy Transfer Partners’ Business

   29

Risks Related to Conflicts of Interest

   39

Tax Risks to Our Common Unitholders

   42

USE OF PROCEEDS

   45

CAPITALIZATION

   46

DILUTION

   47

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

   48

General

   48

Our Initial Distribution Rate

   49

Unaudited Pro Forma Consolidated Available Cash

   53

Estimated Consolidated Adjusted EBITDA

   57

Estimated Cash Available to Pay Distributions Based Upon Estimated Consolidated Adjusted EBITDA

   58

Assumptions and Considerations

   62

Our Sources of Distributable Cash

   63

PARTNERSHIP AGREEMENT PROVISIONS RELATING TO CASH DISTRIBUTIONS

   65

General

   65

Definition of Available Cash

   65

Class B Units

   65

General Partner Interest

   65

Adjustments to Capital Accounts

   66

Distributions of Cash upon Liquidation

   66

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

   67

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

   72

Overview

   72

Energy Transfer Partners

   75

 

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Table of Contents
Index to Financial Statements
     Page

Overview of Operations of ETP

   77

Analysis of Historical Results of Operations

   79

Nine Month Operating Results by Segment

   86

Heritage—Results of Operations

   103

Liquidity and Capital Resources

   105

Debt Obligations

   109

New Accounting Standards

   115

Critical Accounting Policies and Estimates

   116

Quantitative and Qualitative Disclosures about Market Risk

   118

BUSINESS OF ENERGY TRANSFER EQUITY

   123

General

   123

Our Interests in ETP

   123

Our Business Strategy

   125

How Our Partnership Agreement Terms Differ from those of Other Publicly Traded Partnerships

   127

Legal Proceedings

   127

BUSINESS OF ENERGY TRANSFER PARTNERS

   128

General

   128

ETP’s Business Strategy

   131

Competitive Strengths

   132

Midstream Natural Gas Industry Overview

   134

Propane Industry Overview

   135

Midstream, Transportation and Storage Segments

   136

Propane Segments

   139

Government Regulation and Environmental Matters

   142

Employees

   144

Title to Properties

   144

Legal Proceedings

   146

MANAGEMENT

   148

Energy Transfer Equity

   148

Energy Transfer Partners

   155

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   163

Energy Transfer Equity

   163

Energy Transfer Partners

   164

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   166

Our Related Party Transactions

   166

Related Party Transactions of ETP

   166

Indemnification of Directors and Officers

   167

Material Provisions of Our General Partner’s Limited Liability Company Agreement

   167

Shared Services Agreement

   167

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

   168

Conflicts of Interest

   168

Fiduciary Duties

   170

DESCRIPTION OF OUR UNITS

   173

Transfer Agent and Registrar

   173

Transfer of Common Units

   173

Class B Units

   174

DESCRIPTION OF OUR PARTNERSHIP AGREEMENT

   175

Organization and Duration

   175

Purpose

   175

Power of Attorney

   175

 

ii


Table of Contents
Index to Financial Statements
     Page

Capital Contributions

   175

Limited Liability

   175

Voting Rights

   176

Issuance of Additional Securities

   177

Amendments to Our Partnership Agreement

   178

Merger, Sale or Other Disposition of Assets

   179

Termination or Dissolution

   180

Liquidation and Distribution of Proceeds

   180

Withdrawal or Removal of Our General Partner

   180

Transfer of General Partner Interest

   181

Transfer of Ownership Interests in Our General Partner

   182

Change of Management Provisions

   182

Limited Call Right

   182

Meetings; Voting

   182

Status as Limited Partner

   183

Non-Citizen Assignees; Redemption

   183

Indemnification

   183

Reimbursement of Expenses

   184

Books and Reports

   184

Right to Inspect Our Books and Records

   184

Registration Rights

   185

ENERGY TRANSFER PARTNERS’ CASH DISTRIBUTION POLICY

   186

Distributions of Available Cash

   186

Operating Surplus and Capital Surplus

   186

Incentive Distribution Rights

   187

Distributions of Available Cash from Operating Surplus

   187

Distributions of Available Cash from Capital Surplus

   188

Distributions of Cash Upon Liquidation

   188

MATERIAL PROVISIONS OF ENERGY TRANSFER PARTNERS’ PARTNERSHIP AGREEMENT

   190

Voting Rights

   190

Issuance of Additional Securities

   190

Amendments to ETP’s Partnership Agreement

   191

Merger, Sale or Other Disposition of Assets

   192

Termination or Dissolution

   192

Liquidation and Distribution of Proceeds

   193

Withdrawal or Removal of ETP’s General Partner

   193

Transfer of General Partner Interests

   194

Change of Management Provisions

   194

Limited Call Right

   195

Reimbursement of Expenses

   195

Indemnification

   195

Registration Rights

   195

UNITS ELIGIBLE FOR FUTURE SALE

   196

MATERIAL TAX CONSEQUENCES

   197

Partnership Status

   197

Limited Partner Status

   199

Tax Consequences of Unit Ownership

   199

Tax Treatment of Operations

   204

Disposition of Units

   205

 

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Table of Contents
Index to Financial Statements
     Page

Uniformity of Units

   206

Tax-Exempt Organizations and Other Investors

   207

Administrative Matters

   208

State, Local, Foreign and Other Tax Considerations

   210

INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS

   211

UNDERWRITING

   212

Over-Allotment Option

   212

Commissions and Discounts

   212

No Sales of Similar Securities

   213

New York Stock Exchange Listing

   213

Price Stabilizations, Short Positions

   213

Determination of Offering Price

   214

Affiliations

   215

Directed Unit Program

   215

VALIDITY OF THE UNITS

   216

EXPERTS

   216

WHERE YOU CAN FIND MORE INFORMATION

   217

INDEX TO FINANCIAL STATEMENTS

   F-1

 

Appendix A

     Second Amended and Restated Agreement of Limited Partnership of Energy
Transfer Equity, L.P.
   A-1

Appendix B

    

Glossary of Terms

   B-1

 

You should rely only on the information contained or incorporated by reference in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, offering to sell our common units or seeking offers to buy our common units in any jurisdiction where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common units offered hereby.

 


 

Until                 , 2005 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common units, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments and subscriptions.

 

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Index to Financial Statements

PROSPECTUS SUMMARY

 

This summary may not contain all of the information that is important to you. To understand this offering fully, you should read this entire prospectus carefully, including the risk factors and the financial statements and notes to those statements. Except as otherwise indicated, the information presented in this prospectus assumes that the underwriters do not exercise their over-allotment option. 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. All references in this prospectus to ETP’s number of common units, cash distributions, earnings per unit or unit price give effect to ETP’s two-for-one unit split on March 16, 2005.

 

Energy Transfer Equity, L.P.

 

We are a Delaware limited partnership that currently owns three types of equity interests in Energy Transfer Partners. In addition to indirectly owning the 2% general partnership interest and 50% of the incentive distribution rights in ETP, as of the closing of this offering we will directly own approximately 33% of Energy Transfer Partners’ outstanding common units. ETP is a publicly traded limited partnership that is primarily engaged in the natural gas midstream, transportation and storage business and also has a national retail propane business. As of August 31, 2005, ETP had an equity market capitalization of approximately $4.0 billion, making it the third largest publicly traded master limited partnership in equity market capitalization.

 

Our Interests in ETP

 

Our aggregate partnership interests in ETP consist of the following:

 

    the 2% general partner interest in ETP, which we hold through our ownership interests in Energy Transfer Partners GP;

 

    50% of the outstanding incentive distribution rights in ETP, which we hold through our ownership interests in Energy Transfer Partners GP; and

 

    approximately 36.4 million common units of ETP (including 3.64 million common units of ETP which we will purchase at the closing of this offering), all of which are held directly by us.

 

Our cash flows consist of distributions from ETP on these partnership interests. ETP is required by its partnership agreement to distribute all of its excess cash on hand at the end of each quarter after establishing reserves to provide for the proper conduct of ETP’s business or to provide for future distributions.

 

ETP has increased its quarterly distribution on its common units 16 times since its initial public offering in 1996. On September 2, 2005, ETP increased the quarterly distribution to $0.50 per unit per quarter for the fiscal quarter ended August 31, 2005 (or $2.00 per unit on an annualized basis). Under ETP’s current capital structure, a distribution of $0.50 per unit of ETP will result in a quarterly distribution to us of approximately $26.4 million in respect of our partnership interests in ETP. We forecast that our partnership interests in ETP will generate $105.4 million in cash to us for the fiscal year ending August 31, 2006, assuming a $2.00 per unit annual distribution.

 

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Index to Financial Statements

The incentive distribution rights of ETP entitle Energy Transfer Partners GP, as the holder of those rights, to receive the following percentages of cash distributed by ETP as the following target cash distribution levels are reached:

 

    13.0% of all cash distributed in a quarter after $0.275 has been distributed in respect of each common unit of ETP for that quarter;

 

    23.0% of all cash distributed in a quarter after $0.3175 has been distributed in respect of each common unit of ETP for that quarter; and

 

    the maximum sharing level of 48.0% of all cash distributed in a quarter after $0.4125 has been distributed in respect of each common unit of ETP for that quarter.

 

Because we indirectly hold 50% of the outstanding incentive distribution rights in ETP through our ownership interest in Energy Transfer Partners GP, we are entitled to receive 50% of the cash distributed in accordance with the thresholds specified above.

 

As ETP has increased the quarterly cash distributions paid on its units, we have received increasing payouts on our interests in ETP. These increased cash distributions by ETP have caused the target cash distribution levels described above to be met, thereby increasing the amounts paid by ETP to Energy Transfer Partners GP as the owner of ETP’s incentive distribution rights. As a consequence, our cash distributions from ETP that are based on our indirect ownership of 50% of the incentive distribution rights have increased more rapidly than those based on our ownership of the general partner interest in ETP and ETP common units. Future growth in the distributions that we receive from ETP will not result from an increase in the sharing level associated with the incentive distribution rights as our incentive distribution rights currently participate at the maximum sharing level described above.

 

The graph set forth below shows hypothetical cash distributions payable in respect of our partnership interests, including the incentive distribution rights in ETP, across an illustrative range of annualized cash distributions per unit made by ETP. This information is based upon:

 

    ETP’s 110,534,514 common units outstanding as of the date of the closing of this offering; and

 

    our ownership of (1) the 2% general partner interest in ETP, (2) 50% of the incentive distribution rights in ETP and (3) approximately 36.4 million common units of ETP.

 

2


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Index to Financial Statements

The graph illustrates the impact to us of ETP raising or lowering its per unit distribution of available cash from operating surplus from the current quarterly distribution of $0.50 per unit, or $2.00 per unit on an annualized basis. This information is presented for illustrative purposes only, is not intended to be a prediction of future performance and does not attempt to illustrate the impact that changes in our business, including changes that may result from changes in interest rates, changes in natural gas prices, changes in general economic conditions, or the impact of any future acquisitions or expansion projects, will have on our performance.

 

LOGO

 

The aggregate amount of ETP’s cash distributions to us will vary depending on several factors, including ETP’s total outstanding partnership interests on the record date for the distribution, the aggregate cash distributions made by ETP and the amount of ETP’s partnership interests we own. If ETP increases distributions to its unitholders, including us, we would expect to increase distributions to our unitholders, although the timing and amount of such increased distributions, if any, will not necessarily be comparable to the timing and amount of the increase in distributions made by ETP. In addition, the level of distributions we receive may be affected by the various risks associated with an investment in us and the underlying business of ETP. Please read “Risk Factors” and “Energy Transfer Partners’ Cash Distribution Policy.”

 

Our Business Strategy

 

Our primary business objective is to increase our cash distributions to our unitholders by actively assisting ETP in executing its business strategy. We intend to support ETP in implementing its business strategy by assisting ETP in identifying, evaluating, and pursuing growth opportunities. In the future, we may also support the growth of ETP through the use of our capital resources, which could involve loans, capital contributions or other forms of credit support to ETP. This funding could be used for the acquisition by ETP of a business or asset or for an internal growth project. In addition, the availability of this capital could assist ETP in arranging financing for a project, reducing its financing costs or otherwise supporting a merger or acquisition transaction.

 

ETP’s primary objective is to increase the level of its cash distributions over time by pursuing a business strategy that is currently focused on growing its intrastate natural gas midstream business (including transportation, gathering, compression, treating, processing, storage and marketing) and its national propane business through, among other things, pursuing construction and expansion opportunities relating to its existing infrastructure and acquiring additional businesses or assets.

 

3


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Index to Financial Statements

ETP has grown significantly through acquisitions and through internal growth projects. The significant acquisitions and internal construction projects that ETP has completed beginning in January 2004 include:

 

    Energy Transfer Transactions. In January 2004, in a series of related transactions, the midstream and transportation operations of La Grange Acquisition, L.P. were combined with the retail propane operations of Heritage Propane Partners, L.P., a publicly traded limited partnership. These transactions, which we refer to as the “Energy Transfer Transactions,” were valued at approximately $1.0 billion and created ETP. Subsequent to these transactions, the combined partnership’s name was changed to Energy Transfer Partners, L.P.

 

    ET Fuel System. In June 2004, ETP acquired the midstream natural gas assets of TXU Fuel Company (now referred to as the ET Fuel System) from TXU Corp. for approximately $500 million. The ET Fuel System is comprised of approximately 2,000 miles of intrastate natural gas pipelines and related natural gas storage facilities that serve some of the most active natural gas drilling areas in Texas and provide direct access to power plants and interconnects with other intrastate and interstate pipelines that serve major markets.

 

    East Texas Pipeline. In June 2004, ETP completed the construction of the Bossier Pipeline (now referred to as the East Texas Pipeline). The East Texas Pipeline is a 78-mile natural gas pipeline that provides transportation from the Bossier Sands drilling area in east and north central Texas to ETP’s Southeast Texas System. This pipeline cost approximately $71.4 million to construct.

 

    Texas Chalk and Madison Systems. In November 2004, ETP acquired the Texas Chalk and Madison Systems from Devon Energy Corporation for approximately $65.0 million. These systems consist of approximately 1,800 miles of gathering and mainline pipelines, four natural gas treating facilities and a natural gas processing facility located in central Texas near our existing gathering and processing assets.

 

    Houston Pipeline System. In January 2005, ETP acquired the Houston Pipeline System from American Electric Power Company, Inc. for approximately $825.0 million plus $174.0 million in natural gas inventory, subject to working capital adjustments. This system is comprised of six main transportation pipelines, three market area loops and the largest natural gas storage facility in Texas.

 

    Fort Worth Basin. In May 2005, ETP completed the construction of the Fort Worth Basin Pipeline, a 55-mile pipeline that provides transportation for natural gas production from the Barnett Shale producing area in north central Texas to ETP’s North Texas Pipeline. This pipeline cost approximately $53.0 million to construct.

 

Through these acquisitions and internal growth projects, ETP has created an integrated natural gas transportation and storage system in Texas that facilitates the movement of natural gas from all of the significant natural gas producing areas in Texas to major metropolitan areas in Texas, including Dallas, Houston, Austin and San Antonio, as well as major market hubs and interstate pipelines that transport natural gas to other areas in the United States. This integrated system provides significant opportunities for additional internal growth projects that we believe will generate substantial returns on invested capital without the material execution and commercial risks typically associated with external projects. ETP recently announced approximately $500 million of capital expenditures during the next 12 to 24 months for the two internal growth projects described below.

 

ETP’s two recently announced major expansion projects involve several pipeline projects that are expected to increase pipeline transportation access for natural gas producers in the Bossier Sands and Barnett Shale basins in east and north Texas to various markets throughout Texas as well as to markets in the eastern United States through interconnects with other intrastate and interstate pipelines. The larger of the two expansion projects is expected to involve the construction of approximately 264 miles of pipeline and the addition of approximately 40,000 horsepower of compression at a cost of approximately $454 million. This expansion project is supported

 

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Index to Financial Statements

by a 10-year agreement with XTO Energy, Inc. pursuant to which XTO Energy has agreed to transport specified volumes of natural gas on an annual basis and is entitled to transport additional volumes under similar terms. ETP’s other major expansion project involves the construction, on a joint venture basis with Atmos Energy Corp., of a 30-inch pipeline in the north Fort Worth Basin area that will provide an additional outlet for natural gas from the Barnett Shale area to several market hubs. These expansion projects will continue the integration of several pipeline systems and natural gas storage facilities, including the integration of ETP’s Katy Pipeline and its Southeast Texas System with the recently acquired ET Fuel System and Houston Pipeline System.

 

Our Structure

 

We were formed in September 2002 as La Grange Energy, L.P., a Texas limited partnership. In February 2005, we changed our name to Energy Transfer Company, L.P. In August 2005, we converted from a Texas limited partnership to a Delaware limited partnership and changed our name to Energy Transfer Equity, L.P. The chart that follows depicts our and our affiliates’ simplified organizational and ownership structure after giving effect to this offering (and based on the ownership of ETP as of the closing of this offering), at which time:

 

    Our general partner will own a 0.5% general partner interest in us.

 

    Our public unitholders will own 15,000,000 common units representing a 12.9% limited partner interest in us, and our current owners and management will own approximately 100.6 million common units on a fully diluted basis assuming conversion of all outstanding Class B units into common units on a one-for-one basis, representing a 86.6% limited partner interest in us.

 

    We will own approximately 36.4 million common units of ETP, which will represent approximately 33% of the outstanding common units of ETP at the closing of this offering. This total includes 3.64 million common units of ETP that we intend to purchase from ETP upon the closing of this offering. We intend to fund the purchase of these additional units in part through the net proceeds of this offering and in part through cash contributed to us by our owners prior to the closing of this offering.

 

    We will hold the 2% general partner interest in ETP through our ownership of equity interests in Energy Transfer Partners GP.

 

    We will hold 50% of the incentive distribution rights in ETP through our ownership of equity interests in Energy Transfer Partners GP.

 

The remaining 50% of the incentive distribution rights in ETP are held by Energy Transfer Investments, L.P., or ETI, through its ownership interests in Energy Transfer Partners GP. Our general partner, which is owned by Ray C. Davis, Kelcy L. Warren and Natural Gas Partners VI, L.P., also owns 100% of the general partner interest of the limited partnership that is the general partner of ETI.

 

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Index to Financial Statements

LOGO

 

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Index to Financial Statements

Our Management

 

Our general partner, LE GP, LLC, will manage our operations and activities. Some of the non-independent directors of our general partner also serve as directors of the general partner of ETP. Please read “Management.” Our general partner will receive a management fee of $500,000 per year for its management of our business and will be entitled to be reimbursed for all direct and indirect expenses incurred on our behalf. In addition, we will enter into a shared services agreement with ETP in connection with the closing of this offering, pursuant to which ETP will provide substantially all employees and financial, accounting, administrative, legal and other services to us. Pursuant to the shared services agreement, we will pay ETP a fixed annual fee of approximately $500,000 and reimburse ETP at cost for all services provided to us. Please read “Certain Relationships and Related Party Transactions—Shared Services Agreement.”

 

Our Principal Executive Offices

 

Our principal executive offices are located at 2828 Woodside Street, Dallas, Texas 75204, and our telephone number at that location is (214) 981-0700.

 

Energy Transfer Partners, L.P.

 

ETP is primarily engaged in the natural gas midstream, transportation and storage business and the retail propane business. ETP was originally formed as Heritage Propane Partners, L.P., a master limited partnership that completed its initial public offering in 1996. In January 2004, the propane operations of Heritage Propane Partners were combined with the natural gas midstream and transportation business of La Grange Acquisition, L.P. In March 2004, the combined entity’s name was changed to Energy Transfer Partners, L.P. As of August 31, 2005, ETP was the third largest publicly traded master limited partnership in the United States by equity market capitalization.

 

ETP’s natural gas midstream, transportation and storage operations are primarily located in major natural gas producing regions of Texas and Louisiana. These operations consist of approximately 11,700 miles of natural gas gathering and transportation pipelines, three natural gas processing plants, two of which are currently connected to ETP’s gathering systems, 14 natural gas treating facilities and three natural gas storage facilities. The midstream business of ETP focuses on the gathering, compression, treating, processing and marketing of natural gas and is currently concentrated in the Austin Chalk trend of southeast Texas, the Permian Basin of west Texas, the Bossier Sands area in east Texas and the Barnett Shale in north Texas. ETP owns or has an interest in various other midstream assets located in east Texas and Louisiana, including the Vantex System, the Rusk County Gathering System, the Whiskey Bay System, the Dorado System and the Chalkley Transmission System. The transportation and storage business of ETP 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 the Oasis Pipeline, the East Texas Pipeline System, the ET Fuel System, the Houston Pipeline System and the recently completed Fort Worth Basin Pipeline, all of which are located in Texas. ETP is also the fourth largest retail propane marketer in the United States, having propane operations which serve more than 700,000 customers in 34 states, primarily in the western, upper midwestern, northeastern and southeastern regions of the United States.

 

ETP’s business strategies are to:

 

    continue to focus on its intrastate natural gas transportation and storage operations;

 

    leverage its existing midstream infrastructure and customer relationships by constructing and expanding systems to meet new or increased demand for midstream services;

 

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Index to Financial Statements
    make strategic acquisitions of midstream and transportation assets that offer the opportunity for operational efficiencies and the potential for increased utilization and expansion of its existing and acquired assets;

 

    increase the profitability of its existing midstream asset base by adding new volumes of natural gas, undertaking additional initiatives to enhance utilization and reducing costs by improving operations;

 

    increase its fee-based cash flow in its midstream, natural gas transportation and natural gas storage businesses;

 

    grow its retail propane business through complementary acquisitions; and

 

    enhance its propane business by maintaining low-cost, decentralized operations.

 

ETP is a limited partnership formed under the laws of the State of Delaware. Its executive offices are located at 2838 Woodside Street, Dallas, Texas 75204 and its telephone number at that location is (214) 981-0700. ETP maintains a website at http://www.energytransfer.com that provides information about its business and operations. Information contained on this website, however, is not incorporated into or otherwise a part of this prospectus. ETP also files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. ETP’s Commission filings are available to the public over the Internet at the Commission’s website at http://www.sec.gov. You may also read and copy any document ETP files at the Commission’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Commission’s public reference room by calling the Commission at 1-800-SEC-0330.

 

Comparison of Rights of Holders of Our Common Units and ETP’s Common Units

 

Our common units and ETP’s common units may not trade in simple relation or proportion to one another. Instead, while the trading prices of our common units and ETP’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things:

 

    ETP’s cash distributions to its common unitholders have a priority over our incentive distribution rights in ETP;

 

    we participate in ETP’s general partner’s distributions and the incentive distribution rights, and ETP’s common unitholders do not; and

 

    we may enter into other businesses separate from ETP or any of its affiliates. See “—Our Interests in ETP.”

 

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Index to Financial Statements

The following table compares certain features of ETP’s common units and our common units.

 

   

ETP’s Common Units


 

Our Common Units


Taxation of Entity and Entity Owners  

ETP is a flow-through entity that is not subject to an entity-level federal income tax.

 

ETP common unitholders will be allocated an amount of federal taxable income for the cumulative period ending December 31, 2008 related to ETP’s operations that is expected to be less than the cumulative amount of cash distributions that they receive with respect to that period.

 

 

 

 

ETP common unitholders will receive Schedule K-1s from ETP reflecting the unitholders’ share of ETP’s items of income, gain, loss and deduction at the end of each fiscal year.

 

Similarly, we are a flow-through entity that is not subject to an entity-level federal income tax.

 

Similarly, our common unitholders will be allocated an amount of federal income tax for the cumulative period ending December 31, 2008 related to our operations that is expected to be less than the amount of cash distributions that they receive with respect to that period, although the ratio of taxable income allocated to our unitholders in relation to our cash distributions will be less than the ratio of taxable income allocated to ETP’s unitholders in relation to its cash distributions.

 

Our common unitholders also will receive Schedule K-1s from us reflecting the unitholders’ share of our items of income, gain, loss and deduction at the end of each fiscal year.

 

Sources of Cash Flow   ETP is our subsidiary and may engage in acquisition and development activities that expand its business and operations.   Our cash-generating assets consist of our partnership interests in ETP, including incentive distribution rights, and we currently have no independent operations. Accordingly, our financial performance and our ability to pay cash distributions to our unitholders is currently directly dependent upon the performance of ETP.
Limitation on Issuance of Additional Units   ETP may issue an unlimited number of additional partnership interests and other equity securities without obtaining unitholder approval.   Similarly, we may issue an unlimited number of additional partnership interests and other equity securities without obtaining unitholder approval.

 

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Summary of Risk Factors

 

An investment in our units involves risks. These risks include, but are not limited to, those described below. For a more complete description of the risks we face, see “Risk Factors.”

 

Risks Inherent in an Investment in Us

 

    Our only assets at the closing of this offering will be our partnership interests in ETP and therefore our cash flow initially will be completely dependent upon the ability of ETP to make distributions in respect of those partnership interests.

 

    In the future, we may not have sufficient cash to pay distributions at our estimated initial quarterly distribution level or to increase distributions.

 

    Following the completion of this offering, affiliates of our general partner will own 86.6% of our common units on a fully diluted basis, a sufficient number to change our cash distribution policy, amend our partnership agreement and block any attempt to remove our general partner.

 

    You will experience immediate and substantial dilution of $20.69 per unit.

 

    The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public markets, including sales by our existing unitholders.

 

    The control of our general partner and the limited partnership that indirectly holds the other 50% of the incentive distribution rights in ETP may be transferred to a third party without unitholder consent.

 

    Our general partner only has one executive officer, and we are dependent on third parties, including key personnel of ETP under a shared services agreement, to provide the financial, accounting, administrative, legal and other services necessary to operate our business.

 

Risks Related to ETP’s Business

 

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

 

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

 

    ETP may be unable to fully execute its growth strategy if it encounters illiquid capital markets or increased competition for qualified assets.

 

    If ETP does not make acquisitions on economically acceptable terms, its future growth could be limited.

 

    ETP depends on certain key producers for its supply of natural gas on the Southeast Texas System, and the loss of any of these key producers could adversely affect its financial results.

 

    ETP depends on key customers to transport natural gas on its East Texas Pipeline and ET Fuel System.

 

    Federal, state or local regulatory measures could adversely affect ETP’s business.

 

    ETP’s business involves hazardous substances and may be adversely affected by environmental regulation.

 

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

 

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

 

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

 

    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 us.

 

    ETP may be unable to bypass the La Grange processing plant, which could expose it to the risk of unfavorable processing margins.

 

    ETP may be unable to retain existing customers or secure new customers, which would reduce its revenues and limit its future profitability.

 

    ETP’s storage business depends on neighboring pipelines to transport natural gas.

 

    ETP’s pipeline integrity program may cause it to incur significant costs and liabilities.

 

    Because weather conditions may adversely affect demand for propane, the volumes of propane sold by and the results of operations of ETP’s propane business are vulnerable to warm winters.

 

    Sudden and sharp propane price increases that cannot be passed on to customers may adversely affect the profit margins of ETP’s propane business.

 

    ETP’s results of operations and its ability to make distributions or pay interest or principal on debt securities could be negatively impacted by price and inventory risk related to its propane business and management of these risks.

 

    ETP’s propane business depends on its principal propane suppliers, which increases the risk of an interruption in supply.

 

    Competition from alternative energy sources may cause ETP to lose propane customers, thereby reducing its revenues.

 

    Energy efficiency and technological advances may affect the demand for propane and adversely affect ETP’s operating results.

 

Risks Related to Conflicts of Interest

 

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

 

    Our general partner’s affiliates, including the partnership that indirectly holds the other 50% of ETP’s incentive distribution rights, may compete with us.

 

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

 

    Our general partner has a limited call right that may require you to sell your units at an undesirable time or price.

 

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

 

Tax Risks to Our Unitholders

 

    If we or ETP were to become subject to entity-level taxation for federal or state tax purposes, then our cash available for distribution to you would be substantially reduced.

 

    A successful IRS contest of the federal income tax positions we or ETP take may adversely impact the market for our common units or ETP common units, and the costs of any contest will reduce cash available for distribution to our unitholders.

 

    Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

 

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The Offering

 

Common units offered by Energy Transfer Equity

15,000,000 common units or 17,250,000 common units if the underwriters exercise their over-allotment option in full.

 

Common units outstanding after this offering

115,560,061 common units (on a fully diluted basis assuming conversion of all outstanding Class B units that are convertible into common units on a one-for-one basis).

 

Use of proceeds

We will use a portion of the net proceeds from this offering, in addition to cash from a capital contribution of $119.7 million to be made by our equity owners prior to the closing of this offering:

 

    to repay approximately $240 million of indebtedness outstanding under our term loan facility;

 

    to fund the acquisition of an additional 3.64 million ETP common units; and

 

    for general partnership purposes. Please read “Use of Proceeds.”

 

    If the underwriters exercise all or any portion of their over-allotment option, we will use all of the net proceeds from the sale of our common units sold pursuant to the exercise of that option to fund the redemption of an equal number of common units from our current equity owners.

 

 

An affiliate of Wachovia Securities Capital Markets, LLC, an underwriter in this offering, is a lender under our term loan facility and will be repaid with a portion of the net proceeds of this offering. Please read “Underwriting.”

 

Cash distributions

We intend to make an initial quarterly distribution of $0.175 per common unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and ETP. In general, we will initially distribute 99.5% of our available cash each quarter to the holders of common units and Class B units and 0.5% of our available cash to our general partner.

 

 

We expect to pay you a prorated distribution for the first quarter during which we are a publicly traded partnership. This distribution would be paid for the period beginning on the first day our common units are publicly traded and ending on the last day of that fiscal quarter. Therefore, assuming that we become a publicly traded partnership after November 30, 2005 and before February 28, 2006, we would pay you a distribution for the period from the first day our common units are publicly traded to and including February 28, 2006. However, we cannot assure you that any distributions will be declared or paid.

 

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We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement and in the glossary of terms attached as Appendix B. The amount of available cash may be greater than or less than the initial quarterly distribution.

 

 

We believe that, based on the assumptions described under the caption “Our Cash Distribution Policy and Restrictions on Distributions,” we will have sufficient cash from operations to make the initial quarterly distribution of $0.175 per unit on all units for each quarter through August 31, 2006. The amount of pro forma, as adjusted, cash available for distribution generated during the year ended August 31, 2004 and for the nine months ended May 31, 2005 would have been more than sufficient to allow us to fully pay the initial quarterly distribution on our common units. Please read “Our Cash Distribution Policy and Restrictions on Distributions” beginning on page 47 of this prospectus.

 

Issuance of additional units

We may issue an unlimited number of common units in the future on terms and conditions established by our general partner without unitholder approval. Our general partner is not required to make additional capital contributions to us in connection with issuances by us of additional units. To the extent our general partner does not make additional capital contributions to us when we issue additional units, its general partner interest in us will be proportionately reduced.

 

Limited call right

If at any time our affiliates own more than 90% of our outstanding units, our general partner has the right, but not the obligation, to purchase all of the remaining units at a price not less than the then-current market price of the units.

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or its officers or directors. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding units, including units owned by our general partner and its affiliates, voting together as a single class. Upon completion of this offering, affiliates of our general partner will own approximately 86.6% of our outstanding common units and Class B units. This ownership level will enable our general partner and these affiliates to prevent our general partner’s involuntary removal. Please read “Description of Our Partnership Agreement—Withdrawal or Removal of Our General Partner.”

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through December 31, 2008, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period

 

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that will be less than     % of the cash distributed with respect to that period. This estimate is based on an assumed quarterly distribution of $0.175 per our common unit and other assumptions with respect to our operations, gross income, capital expenditures, cash flow and anticipated distributions. Moreover, if ETP is successful in increasing its distributions over time, our ratio of taxable income to cash distributions will increase. For the basis of this estimate, please read “Material Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions.”

 

Exchange listing

We intend to list our common units on the New York Stock Exchange under the symbol “ETE.”

 

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Summary of Conflicts of Interest and Fiduciary Duties

 

Conflicts of Interest. Conflicts of interest exist and may arise in the future as a result of the relationships among us, ETP and our and their respective general partners and affiliates. The owners of our general partner are Ray C. Davis, Kelcy L. Warren and Natural Gas Partners VI, L.P. These owners also control Energy Transfer Investments, L.P., which holds 50% of the incentive distribution rights in ETP through its ownership of equity interests in the general partner of ETP. Natural Gas Partners VI, L.P., which we refer to as the “NGP Fund,” is a private equity fund that owns a significant portion of our equity securities and has the right to appoint two directors to the board of directors of our general partner. Mr. Davis and Mr. Warren are the co-chairmen and co-chief executive officers of ETP and also own significant portions of the entities that hold our equity securities. Mr. Davis, Mr. Warren and the NGP Fund have all been involved with ETE since our inception in 2002.

 

Our partnership agreement specifically permits us and our affiliates to engage in any activity, including those that may be in direct competition with ETP. As a result, either we or our affiliates may acquire, construct or dispose of natural gas midstream, transportation and storage or propane assets without any obligation to offer ETP the opportunity to acquire those assets. However, because we have a strong incentive to support the growth of ETP due to our significant ownership interest in ETP, we may offer such assets to ETP if they are complementary to ETP’s strategy or operations. Currently, ETP is not prohibited from engaging in any activity that may compete with us. In the event that we desire to sell any assets to ETP, the corporate governance policies of ETP provide that no such sale may occur unless the purchase by ETP is approved by the audit committee of the ETP board (a committee that satisfies the independence requirements of the New York Stock Exchange) or the purchase by ETP is equitable to ETP, taking into account the totality of the relationships between the parties.

 

Fiduciary Duties. Our general partner’s directors have fiduciary duties to manage our business in a manner beneficial to us and our partners. Our general partner’s directors also have fiduciary duties to its equity owners. Some of the non-independent directors of our general partner also serve as directors of Energy Transfer Partners GP and, as a result, have fiduciary duties to manage the business of ETP in a manner beneficial to ETP and its partners. Consequently, these directors may encounter situations in which their fiduciary obligations to ETP, on the one hand, and us and our equity owners, on the other hand, are in conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders. For a more detailed description of the conflicts of interest involving our general partner and the resolution of these conflicts, please read “Conflicts of Interest and Fiduciary Duties.”

 

Our partnership agreement limits our general partner’s liability for breaches of its fiduciary duty to us and reduces the fiduciary duties of our general partner to our unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions that might otherwise constitute a breach of our general partner’s fiduciary duty owed to unitholders. By purchasing our common units, you are treated as having consented to various actions contemplated in the partnership agreement and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties” for a description of the fiduciary duties imposed on our general partner by Delaware law, the material modifications of these duties contained in our partnership agreement and certain legal rights and remedies available to unitholders.

 

Shared Personnel. Our general partner will manage our operations and activities with assistance from ETP. In connection with the closing of this offering, we will enter into a shared services agreement between Energy Transfer Partners GP and ETP. Under the shared services agreement, personnel of ETP will perform administrative and commercial services for us. The services performed by these personnel will include, but not be limited to, financial, accounting, administrative, legal and other services. We will adopt policies and procedures to protect and prevent inappropriate disclosure by shared personnel of commercial and other non-public information relating to us and ETP. For a more detailed description of our shared services agreement, please read “Certain Relationships and Related Party Transactions—Shared Services Agreement.”

 

For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

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Index to Financial Statements

Summary Historical and Pro Forma Financial and Operating Data

 

The table on the following page shows summary historical consolidated and pro forma financial data for Energy Transfer Equity, L.P., in each case for the periods and as of the dates indicated. The summary historical consolidated statement of operations and cash flow data for the eleven months ended August 31, 2003 and the year ended August 31, 2004 and the balance sheet data as of August 31, 2003 and 2004 are derived from our audited financial statements. The selected historical statement of operations and cash flow data for the nine months ended September 30, 2002 and balance sheet data as of September 30, 2002 are derived from the audited financial statements of Aquila Gas Pipeline, the predecessor to Energy Transfer Partners. The statement of operations, balance sheet, and cash flow data as of and for the nine months ended May 31, 2004 and 2005, are derived from our unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal, recurring accruals, which we consider necessary for the fair presentation of our financial position and results of operations for these periods.

 

We have not had any separate operating activities apart from those conducted by ETP, and at present our cash flows solely consist of distributions from ETP on the partnership interests, including incentive distribution rights, that we own. Accordingly, the summary historical consolidated financial data set forth in the table on the following page primarily reflect the operating activities and results of operations of ETP. Since we control ETP, we reflect our ownership interest in ETP on a consolidated basis, which means that our financial results are combined with ETP’s financial results and the results of our other subsidiaries. The interest owned by non-controlling partners in ETP is reflected as a liability on our balance sheet and the non-controlling partners’ shares of income from ETP is reflected as an expense in our results of operations.

 

The unaudited summary pro forma statement of operations data for the year ended August 31, 2004 and for the nine months ended May 31, 2005 reflect our consolidated historical operating results as adjusted to give pro forma effect to the following transactions as if these transactions occurred on September 1, 2003:

 

    our business combination in January 2004 with Heritage Propane Partners, L.P., which we refer to as “Heritage;”

 

    the acquisition in June 2004 by ETP of the TXU Fuel Company from TXU Corp. and the related debt and equity financings by ETP to pay the purchase price for this acquisition;

 

    the acquisition in January 2005 by ETP of the controlling interests in the companies that own the Houston Pipeline System and the related debt and equity financings by ETP to pay the purchase price for this acquisition;

 

    our new term loan in the aggregate principal amount of $600.0 million, the payment of related expenses and the distribution of the net proceeds of such borrowings to our unitholders in June 2005;

 

    the transfer of class B limited partner interests in ETP GP to Energy Transfer Investments and to us, which entitle ETI and us to each receive 50% of the cash distributions attributable to the ownership of ETP’s incentive distribution rights;

 

    a capital contribution of $119.7 million to be made by our equity owners prior to the closing of this offering; and

 

    this offering and the application of the net proceeds of $266.3 million and the related expenses as described under “Use of Proceeds.”

 

The unaudited pro forma summary balance sheet data as of May 31, 2005 reflect our consolidated historical balance sheet data as adjusted to give pro forma affect to the following transactions, in each case as if the following transactions occurred on May 31, 2005:

 

    our new term loan in the aggregate principal amount of $600.0 million, the payment of related expenses and the distribution of the net proceeds of such borrowings to our unitholders in June 2005;

 

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    the transfer of class B limited partner interests in ETP GP to Energy Transfer Investments and to us, which entitle ETI and us to each receive 50% of the cash distributions attributable to the ownership of ETP’s incentive distribution rights;

 

    a capital contribution of $119.7 million to be made by our equity owners prior to the closing of this offering; and

 

    this offering and the application of the net proceeds of $266.3 million and the related expenses as described under “Use of Proceeds.”

 

For a description of all of the assumptions used in preparing the summary pro forma financial and operating data, you should read the notes to the pro forma financial statements for Energy Transfer Equity, L.P. The pro forma financial and operating data should not be considered as indicative of the historical results we would have had or the future results that we will have after this offering.

 

We derived the data in the following table from, and it should be read together with and is qualified in its entirety by reference to, the historical consolidated and pro forma financial statements and the accompanying notes included in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Historical (a)

    Pro Forma

 
   

Aquila Gas

Pipeline


    Energy Transfer Equity

 
   

Nine Months

Ended

September 30,

2002


   

Eleven Months
Ended

August 31,

2003


   

Year
Ended
August
31,

2004


   

Nine Months Ended

May 31,


   

Year Ended

August 31,

2004


   

Nine Months

Ended

May 31,

2005


 
        2004

    2005

     
    (in thousands, except per unit data)  

Statement of Operations Data:

                                                       

Revenues

  $ 933,099     $ 931,027     $ 2,346,957     $ 1,591,656     $ 4,335,791     $ 6,350,022     $ 6,004,015  

Gross profit

    53,035       105,589       365,533       245,809       579,713       679,026       665,189  

Depreciation and amortization

    22,915       11,870       56,242       32,793       76,874       105,676       85,534  

Operating income

    2,862       55,501       130,806       106,999       234,904       219,490       275,529  

Interest expense

    (3,931 )     (12,453 )     (41,217 )     (25,111 )     (66,350 )     (119,709 )     (99,631 )

Gain on Energy Transfer Transactions

    —         —         395,253       320,893       —         —         —    

Minority interests on continuing operations

    —         —         (35,164 )     (32,170 )     (91,439 )     (76,122 )     (114,745 )
   


 


 


 


 


 


 


Income from continuing operations before income taxes

    4,272       44,673       449,551       371,282       70,047       26,064       58,459  

Income tax (benefit) expense (c)

    (467 )     4,432       2,792       3,861       5,168       5,273       5,776  
   


 


 


 


 


 


 


Income from continuing operations

  $ 4,739     $ 40,241     $ 446,759     $ 367,421     $ 64,879     $ 29,791     $ 52,683  
   


 


 


 


 


 


 


Basic income from continuing operations share/unit (d)

    —       $ 0.25     $ 2.47     $ 2.10     $ 0.33     $ 0.18     $ 0.45  

Distributions share/unit (d)

    —         —       $ 2.49     $ 2.11     $ 0.62     $ 0.18     $ 0.45  

Balance Sheet Data (end of period):

                                                       

Total assets

  $ 601,528     $ 604,140     $ 2,865,193     $ 2,247,760     $ 4,522,355             $ 4,775,394  

Current liabilities

    144,076       169,967       404,917       1,018,670       1,015,618               1,015,618  

Long-term debt

    66,250       196,000       1,071,158       698,343       1,570,155               1,870,155  

Stockholders’ equity/partners’ capital

    254,259       182,631       368,325       307,619       423,975               270,440  

 

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    Historical (a)

 
    Aquila Gas
Pipeline


   

Energy Transfer Equity


 
   

Nine Months

Ended

September 30,

2002


   

Eleven Months

Ended

August 31,

2003


   

Year Ended

August 31,

2004


    Nine Months Ended
May 31,


 
          2004

    2005

 
    (in thousands)  

Other Financial Data:

                                       

EBITDA, as adjusted (unaudited) (e)

  $ 31,118     $ 77,382     $ 158,436     $ 111,715     $ 218,211  

Net cash provided by operating activities

    12,987       70,675       122,098       135,180       216,850  

Net cash used in investing activities

    (487 )     (341,258 )     (731,831 )     (210,279 )     (1,038,645 )

Net cash provided by (used in) financing activities

    (12,500 )     325,655       637,513       86,445       760,550  

(a) We were formed in September 2002 as La Grange Energy, L.P., a Texas limited partnership. On January 20, 2004, we and Heritage completed a series of transactions which, among other things, included:

 

    we contributed our subsidiary La Grange Acquisition, L.P., and its subsidiaries and affiliates who conducted business under the assumed name of Energy Transfer Company, or ETC OLP, to Heritage in exchange for cash, the assumption of certain liabilities and three classes of securities; and

 

    we acquired the general partner of Heritage from its owners.

 

We refer to these transactions as the “Energy Transfer Transactions.” The Energy Transfer Transactions were accounted for as a reverse acquisition in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141). Although Heritage was the surviving parent entity for legal purposes, ETP was the acquirer for accounting purposes. As a result, our historical financial statements are the historical financial statements of the combined company. In February 2005, we changed our name to Energy Transfer Company, L.P. In August 2005, we converted from a Texas limited partnership to a Delaware limited partnership and changed our name to Energy Transfer Equity, L.P.

 

(b) On December 27, 2002, we purchased the remaining 50% of Oasis Pipe Line Company. Prior to December 27, 2002, the interest in Oasis Pipe Line was treated as an equity method investment. After that date, Oasis Pipe Line’s results of operations were consolidated with our results of operations as a wholly owned subsidiary.

 

(c) As a partnership, we are not subject to income taxes. However, our subsidiaries, Oasis Pipe Line, Heritage Holdings, Inc. and Heritage Service Corporation, are corporations that are subject to income taxes. Prior to 2003, Oasis Pipe Line was an equity method investment of ETC OLP, and taxes were netted against the equity method earnings. Aquila Gas Pipeline was a tax-paying corporation, and as such recognized income taxes related to its earnings in all periods presented.

 

(d) Net income per unit is computed by dividing the limited partners’ interest in net income by the weighted average number of units outstanding.

 

(e) EBITDA, as adjusted, is defined as our earnings before interest, taxes, depreciation (adjusted for depreciation directly attributable to minority interests), amortization and other non-cash items, such as compensation charges for unit issuances to employees, gain or loss on disposal of assets, gain or loss on discontinued operations (net of minority interests), gain on the Energy Transfer Transactions and other expenses. We present EBITDA, as adjusted, on a partnership basis, which includes both the general and limited partner interests. Non-cash compensation expense represents charges for the value of the common units awarded under ETP’s compensation plans that have not yet vested under the terms of those plans and are charges which do not, or will not, require cash settlement. Non-cash income or loss such as the gain or loss arising from our disposal of assets, discontinued operations, and the gain on the Energy Transfer Transactions are not included when determining EBITDA, as adjusted. EBITDA, as adjusted, (i) is not a measure of performance calculated in accordance with generally accepted accounting principles and (ii) should not be considered in isolation or as a substitute for net income, income from operations or cash flow as reflected in our consolidated financial statements.

 

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EBITDA, as adjusted, is presented because such information is relevant and is used by management, industry analysts, investors, lenders and rating agencies to assess the financial performance and operating results of the partnership’s fundamental business activities. Management believes that the presentation of EBITDA, as adjusted, is useful to lenders and investors because of its use in the natural gas and propane industries and for master limited partnerships as an indicator of the strength and performance of our ongoing business operations, including the ability to fund capital expenditures, service debt and pay distributions. Additionally, management believes that EBITDA, as adjusted, provides additional and useful information to our investors for trending, analyzing and benchmarking our operating results from period to period as compared to other companies that may have different financing and capital structures. The presentation of EBITDA, as adjusted, allows investors to view the partnership’s performance in a manner similar to the methods used by management and provides additional insight to our operating results.

 

EBITDA, as adjusted, is used by management to determine our operating performance, and along with other data as internal measures for setting annual operating budgets, assessing financial performance of our numerous business locations, as a measure for evaluating targeted businesses for acquisition and as a measurement component of incentive compensation. We have a large number of business locations located in different regions of the United States. EBITDA, as adjusted, can be a meaningful measure of financial performance because it excludes factors which are outside the control of the employees responsible for operating and managing the business locations, and provides information management can use to evaluate the performance of the business locations, or the region where they are located, and the employees responsible for operating them. To present EBITDA, as adjusted, on a full partnership basis, we add back the minority interest of the general partner because net income per limited partner unit is reported net of the general partner’s minority interest. Our EBITDA, as adjusted, includes non-cash compensation expense which is a non-cash expense item resulting from our unit based compensation plans that does not require cash settlement and is not considered during management’s assessment of the operating results of our business. The inclusion of these non-cash compensation expenses in EBITDA, as adjusted, allows management to compare our operating results to those of other companies in the same industry who may have compensation plans with levels and values of annual grants that are different than ETP’s. Other expenses include other finance charges and other asset non-cash impairment charges that are reflected in the partnership’s operating results but are not classified in interest, depreciation and amortization. We do not include gain on the sale of assets when determining EBITDA, as adjusted, since including non-cash income resulting from the sale of assets increases the performance measure in a manner that is not related to the true operating results of our business. In addition, our debt agreements contain financial covenants based on EBITDA, as adjusted. For a description of these covenants, please read Note 5 to our consolidated financial statements included in this prospectus.

 

There are material limitations to using a measure such as EBITDA, as adjusted, including the difficulty associated with using it as the sole measure to compare the results of one company to another, and the inability to analyze certain significant items that directly affect a company’s net income or loss. In addition, our calculation of EBITDA, as adjusted, 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. EBITDA, as adjusted, for the periods described herein is calculated in the same manner as presented by us in the past. Management compensates for these limitations by considering EBITDA, as adjusted, in conjunction with its analysis of other GAAP financial measures, such as gross profit, net income (loss), and cash flow from operating activities. A reconciliation of EBITDA, as adjusted, to net income (loss) is presented below. Please read “Reconciliation of EBITDA, As Adjusted, to Net Income” below.

 

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Reconciliation of EBITDA, as Adjusted, to Net Income

 

The following tables set forth the reconciliation of EBITDA, as adjusted, to our net income for the periods indicated:

 

     Historical

 
     Aquila Gas
Pipeline


    Energy Transfer Equity

 
     Nine Months
Ended
September 30,
2002


    Eleven Months
Ended
August 31,
2003


    Year
Ended
August 31,
2004


    Nine Months Ended
May 31,


 
           2004

    2005

 
     (in thousands)  

Net income

   $ 4,739     $ 46,235     $ 450,217     $ 369,774     $ 121,879  

Gain on Heritage Transaction

     —         —         (395,253 )     —            

Gain on sale of discontinued operations, net of income tax expense

     —         —         —         (320,893 )     (104,562 )

Minority interest expense on gain on sale of discontinued operations

     —         —         —         —         49,686  

Depreciation and amortization

     22,915       11,870       56,242       32,794       76,874  

Interest expense

     3,931       12,453       41,217       25,111       66,350  

Income tax expense on continuing operations

     (467 )     4,432       2,792       3,861       5,168  

Non-cash compensation expense

     —         —         42       —         1,206  

Interest income and other

     —         (202 )     (516 )     (400 )     (67 )

(Gain) loss on disposal of assets

     —                 1,006       235       665  

Minority interests

     —                 —         —         —    

Equity in earnings of investees

     —         1,003                       —    

Depreciation, amortization and interest of investee

     —                 440       315       493  

Depreciation, amortization and interest of discontinued operations

     —         1,591       2,249       918       1,547  

Depreciation, amortization and interest of minority interest

     —         —         —         —         (7,578 )

Loss on extinguishment of debt

     —         —         —         —         6,550  
    


 


 


 


 


EBITDA, as adjusted

   $ 31,118     $ 77,382     $ 158,436     $ 111,715     $ 218,211  
    


 


 


 


 


 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains 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:

 

    the amount of natural gas transported on ETP’s pipelines and gathering systems;

 

    the level of throughput in ETP’s natural gas processing and treating facilities;

 

    the fees ETC OLP charges and the margins realized for its services;

 

    the prices and market demand for, and the relationship between, natural gas and NGLs;

 

    energy prices generally;

 

    the price of propane to the consumer compared to the price of alternative and competing fuels;

 

    the general level of petroleum product demand and the availability and price of propane supplies;

 

    the level of domestic oil, propane and natural gas production;

 

    the availability of imported oil and natural gas;

 

    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;

 

    actions taken by foreign oil and gas producing nations;

 

    the political and economic stability of petroleum producing nations;

 

    the effect of weather conditions on demand for oil, natural gas and propane;

 

    availability of local, intrastate and interstate transportation systems;

 

    the continued ability to find and contract for new sources of natural gas supply;

 

    availability and marketing of competitive fuels;

 

    the impact of energy conservation efforts;

 

    energy efficiencies and technological trends;

 

    the extent of governmental regulation and taxation;

 

    hazards or operating risks incidental to the transporting, treating and processing of natural gas and NGLs or to the transporting, storing and distributing of propane that may not be fully covered by insurance;

 

    the maturity of the propane industry and competition from other propane distributors;

 

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    competition from other midstream companies;

 

    loss of key personnel;

 

    loss of key natural gas producers or the providers of fractionation services;

 

    reductions in the capacity or allocations of third party pipelines that connect with ETP’s pipelines and facilities;

 

    the effectiveness of risk-management policies and procedures and the ability of ETP’s liquids marketing counterparties to satisfy their financial commitments;

 

    the nonpayment or nonperformance by ETP’s customers;

 

    regulatory, environmental, political and legal uncertainties that may affect the timing and cost of our internal growth projects, such as our construction of additional pipeline systems;

 

    the availability and cost of capital and ETP’s ability to access certain capital sources;

 

    changes in laws and regulations to which we are subject, including tax, environmental, transportation and employment regulations;

 

    the costs and effects of legal and administrative proceedings;

 

    the ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to ETP’s financial results and to successfully integrate acquired businesses; and

 

    risks associated with the construction of new pipelines and treating and processing facilities or additions to ETP’s existing pipelines and facilities.

 

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.

 

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RISK FACTORS

 

Risks Inherent in an Investment in Us

 

Our only assets at the closing of this offering will be our partnership interests in ETP and therefore our cash flow initially will be completely dependent upon the ability of ETP to make distributions in respect of those partnership interests.

 

The amount of cash that ETP can distribute to its partners, including us, each quarter principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things:

 

    the amount of natural gas transported in its pipelines and gathering systems;

 

    the throughput volumes in its natural gas processing and treating facilities;

 

    the fees it charges and the margins it realizes for its services;

 

    prices of natural gas and propane;

 

    relationships among crude oil, natural gas and NGL prices;

 

    weather conditions;

 

    the level of its operating costs, including reimbursements to its general partner; and

 

    prevailing economic conditions.

 

In addition, the actual amount of cash that ETP will have available for distribution will depend on other factors, including:

 

    the level of capital expenditures it makes;

 

    the sources of cash used to fund its acquisitions;

 

    its debt service requirements and restrictions contained in its obligations for borrowed money;

 

    fluctuations in its working capital needs; and

 

    the amount of cash reserves established by Energy Transfer Partners GP for the proper conduct of ETP’s business.

 

Because of these factors, ETP may not have sufficient available cash each quarter to continue paying distributions at their current level or at all. Furthermore, 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 be able to make cash distributions during periods when it records losses and may be unable to 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 ETP’s ability to generate distributable cash flow.

 

In the future, we may not have sufficient cash to pay distributions at our estimated initial quarterly distribution level or to increase distributions.

 

The source of our earnings and cash flow will initially consist exclusively of cash distributions from ETP. Therefore, the amount of distributions we are able to make to our unitholders may fluctuate based on the level of distributions ETP makes to its partners. We cannot assure you that ETP will continue to make quarterly distributions at its current level or increase its quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if ETP increases or decreases distributions to us,

 

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the timing and amount of such increased or decreased distributions, if any, will not necessarily be comparable to the timing and amount of the increase or decrease in distributions made by ETP to us.

 

Our ability to distribute cash received from ETP to our unitholders is limited by a number of factors, including:

 

    interest expense and principal payments on our indebtedness;

 

    restrictions on distributions contained in any current or future debt agreements;

 

    our general and administrative expenses, including expenses we will incur as the result of being a public company;

 

    expenses of our subsidiaries other than ETP, including tax liabilities of our corporate subsidiaries, if any;

 

    capital contributions to maintain our 2% general partner interest in ETP as required by the partnership agreement of ETP upon the issuance of additional partnership securities by ETP; and

 

    reserves our general partner believes prudent for us to maintain for the proper conduct of our business or to provide for future distributions.

 

We cannot guarantee that in the future we will be able to pay distributions or that any distributions we do make will be at or above our estimated initial quarterly distribution. The actual amount of cash that is available for distribution to our unitholders will depend on numerous factors, many of which are beyond our control or the control of our general partner.

 

Following the completion of this offering, affiliates of our general partner will own 86.6% of our common units on a fully diluted basis, a sufficient number to change our cash distribution policy, amend our partnership agreement and block any attempt to remove our general partner.

 

Following completion of this offering, our current owners will own approximately 86.6% of our outstanding common units on a fully diluted basis. In addition, some of these owners will be members of the board of directors of our general partner. Because our current owners will have the ability to amend our partnership agreement and change our cash distribution policy after this offering, we cannot assure you that we will maintain or increase the distribution we pay to our common unitholders.

 

Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Our unitholders do not have the ability to elect our general partner or the officers or directors of our general partner.

 

Furthermore, if our unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner may not be removed except upon the vote of the holders of at least 66 2/3% of our outstanding units. Because affiliates of our general partner own approximately 100.6 million of our outstanding units, it will be particularly difficult for our general partner to be removed without the consent of such affiliates. As a result, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

 

A reduction in ETP’s distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

 

Our ownership of 50% of the incentive distribution rights in ETP, through our ownership of equity interests in Energy Transfer Partners 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

 

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distribution levels. The amounts of the cash distributions that we received from ETP related to our ownership interest in the incentive distribution rights has increased at a more rapid rate than the amounts of the cash distributions related to our 2% general partner interest in ETP and our ETP common units. We currently receive our pro rata share of cash distributions from ETP based on the highest incremental percentage, 48%, to which Energy Transfer Partners 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 Energy Transfer Partners GP’s percentage of the incremental cash distributions above $0.3175 per common unit per quarter from 48% to 23%. As a result, any such reduction in quarterly cash distributions from ETP would have the effect of disproportionately reducing the amount of all distributions that we receive from ETP based on our ownership interest in the incentive distribution rights in ETP as compared to cash distributions we receive from ETP on our 2% general partner interest in ETP and our ETP common units.

 

Neither we nor ETP will be prohibited from competing with each other.

 

Neither our partnership agreement nor the partnership agreement of ETP prohibits us from owning assets or engaging in businesses that compete directly or indirectly with ETP or prohibit ETP from owning assets or engaging in businesses that compete directly or indirectly with us, except that ETP’s partnership agreement prohibits us from engaging in the retail propane business in the United States. In addition, we may acquire, construct or dispose of any assets in the future without any obligation to offer ETP the opportunity to purchase or construct any of those assets, and ETP 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 these assets. Please read “Certain Relationships and Related Party Transactions.”

 

Restrictions in our credit facility could limit our ability to make distributions to our unitholders.

 

Our term loan facility contains affirmative covenants relating to, among other things: delivery of financial statements and other reports, including compliance certificates and notice of specified events; maintenance of existence; payment of taxes and claims; maintenance of property and insurance; lender inspection rights; compliance with law, including environmental laws; subsidiary guarantee and security obligations; further assurances; use of proceeds; separateness of ETP; payment of contractual or debt obligations; and subsidiaries. Our term loan facility also contains negative covenants relating to, among other things: incurrence of indebtedness; liens; restricted payments; and restrictions on subsidiary distributions; investments; fundamental changes; dispositions of assets; acquisitions; capital expenditures; sale and lease-back transactions; transactions with affiliates; conduct of business; changes in fiscal year or in tax status; and amendments or waivers of certain agreements or material contracts. This term loan facility also contains covenants requiring us to maintain certain financial ratios. We will be prohibited from making any distributions to our unitholders if the distributions would cause an event of default or otherwise violate a covenant under this term loan facility. For more information about our term loan facility, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt Obligations—Energy Transfer Equity.”

 

Our existing term loan prohibits us from borrowing more than $100.0 million of incremental indebtedness, which prohibition may restrict our ability to pursue business opportunities.

 

Our existing term loan facility prohibits us from borrowing more than $100.0 million of incremental indebtedness, which may restrict our ability to pursue business opportunities that we would want to finance, either in whole or in part, from borrowings rather than from the issuance of additional equity securities, the use of internal cash flow or other financing arrangements.

 

You will experience immediate and substantial dilution of $20.69 per unit.

 

The assumed initial public offering price of $19.00 per unit exceeds our pro forma net tangible book value of ($1.69) per unit after the offering. You will incur immediate and substantial dilution of $20.69 per unit. Please read “Dilution.”

 

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We may issue an unlimited number of limited partner interests without the consent of our unitholders, which would dilute your ownership interest in us and could increase the risk that we would not have sufficient available cash to maintain or increase our per unit distribution level.

 

Our partnership agreement provides that we may issue an unlimited number of limited partner interests without the consent of our unitholders. Such units may be issued on the terms and conditions established in the sole discretion of our general partner. Any issuance of additional units would result in a corresponding decrease in the proportionate ownership interest in us represented by, and could adversely affect the market price of, units outstanding prior to such issuance. The payment of distributions on these additional units could increase the risk that we would be unable to maintain or increase our anticipated initial quarterly distribution. Please read “Description of Our Partnership Agreement—Issuance of Additional Securities.”

 

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public markets, including sales by our existing unitholders.

 

Sales by any of our existing unitholders of a substantial number of our common units in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. We do not know whether any such sales would be made in the public market or in private placements, nor do we know what impact such potential or actual sales would have on our common unit price in the future. Please read “Units Eligible for Future Sale.”

 

Control of our general partner and the limited partnership that indirectly holds the other 50% of the incentive distribution rights in ETP may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its general partner interest in us to a third party in a merger or in a sale of its equity securities without the consent of our unitholders. Furthermore, there is no restriction in the partnership agreement on the ability of the members of our general partner, to sell or transfer all or part of their ownership interest in our general partner to a third party. The new owner or owners of our general partner would then be in a position to replace the directors and officers of our general partner and control the decisions made and actions taken by the board of directors and officers.

 

In addition, the owners of our general partner control the limited partnership that indirectly holds the other 50% of the incentive distribution rights in ETP. This limited partnership can likewise be transferred to a third party without unitholder consent.

 

Our general partner only has one executive officer, and we are dependent on third parties, including key personnel of ETP under a shared services agreement, to provide the financial, accounting, administrative, legal and other services necessary to operate our business.

 

John W. McReynolds, the President and Chief Financial Officer of our general partner, is the only executive officer charged with managing our business. We rely on ETP to provide all of the financial, accounting, administrative, legal and other services needed to operate our business. These services are provided pursuant to the terms of a shared services agreement, and we cannot assure you that these services will continue to be made available to us on terms that are reasonable or at all. In the event that Mr. McReynolds retires, dies or becomes disabled or ceases to serve as the President and Chief Financial Officer of our general partner for any reason, his duties would be provided under the shared services agreement until one or more new executive officers are selected by the board of directors of our general partner.

 

Moreover, we depend on the services of key personnel of ETP, including the ongoing involvement and continued leadership of Ray C. Davis and Kelcy L. Warren, the founders of its midstream business, as well as other key members of ETP’s management team such as H. Michael Krimbill, R.C. Mills and Mackie McCrea. Messrs. Davis and Warren have been integral to the success of ETP’s midstream, transportation and storage

 

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Index to Financial Statements

business because of their ability to identify and develop strategic business opportunities. Losing their leadership could make it difficult for ETP to identify internal growth projects and accretive acquisitions, which could have a material adverse effect on ETP’s ability to increase the cash distributions paid on its partnership interests.

 

ETP’s executive officers that provide services to us pursuant to the shared services agreement will be allocating their time between us and ETP. To the extent that these officers face conflicts regarding the allocation of their time, we may not receive the level of attention from them that the management of our business requires.

 

An increase in interest rates may cause the market price of our common units to decline.

 

Like all equity investments, an investment in our common units is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded limited partnership interests. Reduced demand for our common units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common units to decline.

 

Your liability as a limited partner may not be limited, and our unitholders may have to repay distributions or make additional contributions to us under limited circumstances.

 

As a limited partner in a partnership organized under Delaware law, you could be held liable for our obligations to the same extent as a general partner if you participate in the “control” of our business. Our general partner generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. Additionally, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in many jurisdictions. Please read “Description of Our Partnership Agreement—Limited Liability.”

 

Under limited circumstances, our unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, neither Energy Transfer Equity nor ETP may make a distribution to its unitholders if the distribution would cause Energy Transfer Equity’s or ETP’s respective liabilities to exceed the fair value of their respective assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the partnership for the distribution amount. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

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, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the 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.

 

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Our common unit price may be volatile, and a trading market that will provide you with adequate liquidity may not develop.

 

Prior to this offering there has been no public market for our common units. An active market for our common units may not develop or may not be sustained after this offering. The initial public offering price of our common units will be determined by negotiations between us and the underwriters, based on several factors that we discuss in the “Underwriting” section of this prospectus. This price may not be indicative of the market price for our common units after this initial public offering. The market price of our common units could be subject to significant fluctuations after this offering, and may decline below the initial public offering price. You may be unable to resell your common units at or above the initial public offering price. The following factors could affect our unit price:

 

    ETP’s operating and financial performance and prospects;

 

    quarterly variations in the rate of growth of our financial indicators, such as distributable cash flow per unit, net income and revenues;

 

    changes in revenue or earnings estimates or publication of research reports by analysts;

 

    speculation by the press or investment community;

 

    sales of our common units by our unitholders;

 

    actions by our existing unitholders prior to their disposition of our common units;

 

    announcements by ETP or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, securities offerings or capital commitments;

 

    general market conditions; and

 

    domestic and international economic, legal and regulatory factors related to ETP’s performance.

 

The equity markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common units. In addition, potential investors may be deterred from investing in our common units for various reasons, including the very limited number of publicly traded entities whose assets consist almost exclusively of partnership interests in a publicly traded partnership. The lack of liquidity may also contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

We will incur increased costs as a result of being a public company, including costs related to compliance with Section 404 of Sarbanes-Oxley.

 

Prior to this offering, we have been a private company and have not filed reports with the Commission. Following this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended. Although we produce our financial statements in accordance with the requirements of generally accepted accounting principles, our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. For example, as we prepare to become subject to the requirements of Section 404 of Sarbanes-Oxley for the fiscal year ended August 31, 2006, our auditors may identify deficiencies in the operational effectiveness of our internal controls and procedures and may advise us that these deficiencies could collectively constitute a significant deficiency that may rise to the level of a reportable condition under Section 404. Similarly, when ETP becomes subject to Section 404 upon the filing of its annual report on Form 10-K for the year ended August 31, 2005, its auditors may identify significant deficiencies in its internal controls and procedures.

 

In order to comply with the requirements of Section 404 of Sarbanes-Oxley, both we and ETP will need to hire additional accounting and finance staff and implement new financial systems and procedures. We cannot assure you that we or ETP will be able to hire additional staff or implement appropriate procedures on a timely

 

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basis. Failure to hire such staff and implement such procedures could have an adverse effect on our ability or the ability of ETP to satisfy applicable obligations under the Exchange Act and Sarbanes-Oxley. In addition, the amount of cash distributions from ETP that will be available for distribution to our unitholders will be reduced by the costs associated with our becoming a public company.

 

Our partnership agreement restricts the rights of unitholders owning 20% or more of our units.

 

Our unitholders’ voting rights are restricted by the provision in our partnership agreement generally providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our unitholders’ ability to influence the manner or direction of our management. As a result, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

 

Risks Related to Energy Transfer Partners’ Business

 

Because our cash flow will initially consist exclusively of distributions from ETP, risks to ETP’s business are also risks to us. We have set forth below many of the risks to ETP’s business or results of operations, the occurrence of which could negatively impact ETP’s financial performance and decrease the amount of cash it is able to distribute to us, thereby impacting the amount of cash that is available for distribution to our unitholders.

 

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

 

Income from ETP’s midstream, transportation and storage business is exposed to risks due to fluctuations in commodity prices. For a portion of the natural gas gathered at the Southeast Texas System, ETP purchases natural gas from producers at the wellhead at a price that is at a discount to a specified index price and then gathers and delivers the natural gas to pipelines where ETP typically resells the natural gas at the index price. Generally, the gross margins that ETP realizes under these discount-to-index arrangements decrease in periods of low natural gas prices because these gross margins are based on a percentage of the index price. Accordingly, an increase in the price of natural gas relative to the price of NGLs could have a material adverse effect on ETP’s results of operations.

 

For a portion of the natural gas gathered at the Southeast Texas System, ETP enters into percentage-of-proceeds arrangements and keep-whole arrangements 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, ETP’s 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 a material adverse effect on ETP’s 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 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, ETP’s revenues and gross margins decrease when the price of natural gas increases relative to the price of NGLs if it is not able to bypass its processing plants and sell the unprocessed natural gas.

 

In the past, the prices of natural gas and NGLs have been extremely volatile, and we expect this volatility to continue. For example, during ETP’s fiscal year ended August 31, 2004, the New York Mercantile Exchange

 

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(“NYMEX”) settlement price for the prior month contract ranged from a high of $6.68 per MMBtu to a low of $4.43 per MMBtu. A composite of the Mt. Belvieu average NGLs price based upon ETP’s average NGLs composition during its fiscal year ended August 31, 2004 ranged from a high of approximately $0.79 per gallon to a low of approximately $0.48 per gallon.

 

Average realized natural gas sales prices for ETP’s fiscal year ended August 31, 2004 exceeded its historical realized natural gas prices. For example, ETP’s average realized natural gas price increased $0.14, or 2.8%, from $4.99 per MMBtu for the 11 months ended August 31, 2003 to $5.13 per MMBtu for its fiscal year ended August 31, 2004. On August 31, 2005, the NYMEX settlement price for October natural gas deliveries was $11.47 per MMBtu, which was 122% higher than ETP’s average natural gas price for its fiscal year ended August 31, 2004. Natural gas prices are subject to significant fluctuations, and we cannot assure you that natural gas prices will remain at the high levels recently experienced.

 

ETP’s Oasis Pipeline, East Texas Pipeline System, ET Fuel System and Houston Pipeline System receive fees for transporting natural gas for ETP’s 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 ETP’s transportation pipelines is subject to fluctuation in demand based on 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.

 

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

 

    the impact of weather on the demand for oil and natural gas;

 

    the level of domestic oil and natural gas production;

 

    the availability of imported oil and natural gas;

 

    actions taken by foreign oil and gas producing nations;

 

    the availability of local, intrastate and interstate transportation systems;

 

    the price, availability and marketing of competitive fuels;

 

    the demand for electricity;

 

    the impact of energy conservation efforts; and

 

    the extent of governmental regulation and taxation.

 

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

 

In order to maintain or increase throughput levels on its 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 be unable 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 ETP’s 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 its gathering systems or in areas that provide access to its transportation pipelines or markets to which its systems connect. The primary factors affecting ETP’s ability to attract customers to its transportation pipelines, including the Oasis Pipeline, the East Texas Pipeline System, the ET Fuel System or the Houston Pipeline System, consist

 

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of ETP’s 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 ETP’s 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 time. In particular, the Southeast Texas System covers portions of the Austin Chalk, Buda, Georgetown, Edwards, Wilcox and other producing formations in southeast Texas, which we collectively refer to as the Austin Chalk trend. This natural gas producing region has generally been characterized by high initial flow rates followed by steep initial declines in production. Accordingly, ETP’s cash flows will also decline unless ETP is able to access new supplies of natural gas by connecting additional production to these systems.

 

ETP’s 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 ETP’s areas of operation or in other areas that are connected to its 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 it handles, which would reduce ETP’s revenues and operating income. In addition, ETP’s future growth will depend, in part, upon whether it can contract for additional supplies at a greater rate than the rate of natural decline in its currently connected supplies.

 

The volumes of natural gas ETP transports on its 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 its 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 operated by ETP.

 

ETP may be unable to fully execute its growth strategy if it encounters illiquid capital markets or increased competition for qualified assets.

 

ETP’s 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 ETP’s 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 and other transactions that it believes will present opportunities to realize synergies and increase its cash flow.

 

ETP may require substantial new capital to finance the future development and acquisition of assets and businesses. Limitations on its access to capital will impair its ability to execute this strategy. Expensive capital will limit ETP’s ability to develop or acquire accretive assets. It may be unable to raise the necessary funds on satisfactory terms, if at all.

 

Consistent with ETP’s acquisition strategy, ETP is continuously engaged in discussions with potential sellers regarding the possible acquisition of additional assets or businesses. Such acquisition efforts may involve

 

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ETP’s 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 ETP’s 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. Either occurrence would limit ETP’s ability to fully execute its growth strategy. ETP’s inability to execute its growth strategy may materially adversely impact the market price of our securities.

 

If ETP does not make acquisitions on economically acceptable terms, its future growth could be limited.

 

Historically, ETP’s results of operations, and its ability to grow and to increase distributions to unitholders, including us, has depended principally on its ability to make acquisitions that are accretive to ETP’s distributable cash flow per unit. ETP’s acquisition strategy is based, in part, on its expectation of ongoing divestitures of pipeline assets by large industry participants. A material decrease in such divestitures would limit ETP’s opportunities for future acquisitions and could adversely affect its business, results of operations, financial condition and cash flows available for distribution to its unitholders, including us.

 

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

 

    because it is unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them;

 

    because it is unable to raise financing for such acquisitions on economically acceptable terms;

 

    because it 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; or

 

    because a proposed acquisition is prohibited by applicable antitrust, anti-takeover or other regulations in the United States.

 

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 no increase or even a decrease in distributable cash flow per unit. Any acquisition involves potential risks, including the risk that ETP may:

 

    fail to successfully integrate and realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;

 

    decrease its liquidity by using a significant portion of its available cash or borrowing capacity to finance acquisitions;

 

    significantly increase its interest expense or financial leverage if it incurs additional debt to finance acquisitions;

 

    encounter difficulties operating in new geographic areas or new lines of business;

 

    incur or assume unanticipated liabilities, losses or costs associated with the business or assets acquired for which it is not indemnified or for which the indemnity is inadequate;

 

    be unable to hire, train or retrain qualified personnel to manage and operate its growing business and assets;

 

    less effectively manage its historical assets, due to the diversion of management’s 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.

 

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 it will consider.

 

ETP depends on certain key producers for its supply of natural gas on the Southeast Texas System, and the loss of any of these key producers could adversely affect its financial results.

 

For the fiscal year ended August 31, 2004, Anadarko Petroleum Corp. and Chesapeake Energy Corp. supplied ETP with approximately 41% of the Southeast Texas System’s 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 to ETP, ETP would be adversely affected unless it were able to acquire comparable supplies of natural gas from other producers.

 

ETP depends on key customers to transport natural gas on its East Texas Pipeline and ET Fuel System.

 

ETP has entered into a nine- and ten-year, fee-based transportation contracts with XTO Energy, Inc. pursuant to which XTO Energy has committed to transport certain minimum volumes of natural gas on ETP’s pipelines. ETP has also entered into an eight-year, fee-based transportation contract with TXU Portfolio Management Company, L.P., a subsidiary of TXU Corp., which we refer to as TXU Shipper, to transport natural gas on the ET Fuel System to TXU’s electric generating power plants. ETP has also entered into two eight-year natural gas storage contracts 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 Energy or TXU Shipper to fulfill their contractual obligations under these contracts could have a material adverse effect on ETP’s cash flow and results of operations if it 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 ETP’s business.

 

As a natural gas gatherer and intrastate pipeline company, ETP is generally exempt from Federal Energy Regulatory Commission, or FERC, regulation under the Natural Gas Act of 1938, or NGA, but FERC regulation still significantly affects ETP’s business and the market for its products. In recent years, FERC has pursued pro-competitive policies in the regulation of interstate natural gas pipelines. However, we cannot assure you that FERC will continue this approach 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.

 

The rates, terms and conditions of some of the transportation and storage services ETP provides on 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 collected in excess of fair and equitable rates are subject to refund with interest, and the terms and conditions of service, set forth in the pipeline’s Statement of Operating Conditions, are subject to FERC approval. Failure to observe the service limitations applicable to storage and transportation service under Section 311, failure to comply with the rates approved by FERC for Section 311 service, and failure to comply with the terms and conditions of service established in the pipeline’s FERC-approved Statement of Operating Conditions could result in an alteration of jurisdictional status and/or the imposition of administrative, civil and criminal penalties.

 

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

 

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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, our business may be adversely affected.

 

ETP’s pipeline operations are also subject to ratable take and common purchaser statutes in Texas and Louisiana, the states where it operates. Ratable take statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes have the effect of restricting ETP’s right 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 ETP’s business.

 

ETP’s storage facilities are also subject to the jurisdiction of the TRRC. Generally, the TRRC has jurisdiction over all underground storage of natural gas in Texas, unless the facility is part of an interstate gas pipeline facility. Because the ET Fuel System and the Houston Pipeline System natural gas storage facilities are only connected to intrastate gas pipelines, they fall within the TRRC’s jurisdiction and must be operated pursuant to TRRC permit. Certain changes in ownership or operation of TRRC-jurisdictional storage facilities, such as facility expansions and increases in the maximum operating pressure, must be approved by the TRRC through an amendment to the facility’s existing permit. In addition, the TRRC must approve transfers of the permits. The TRRC’s 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, which requires certain pipeline companies to comply with safety standards in constructing and operating their pipelines, and subjects pipelines to regular inspections. Some of ETP’s gathering facilities are exempt from the requirements of this 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 regulations under the NGA, NGPA, Pipeline Safety Act and certain state laws could result in the imposition of administrative, civil and criminal remedies.

 

ETP’s business involves hazardous substances and may be adversely affected by environmental regulation.

 

ETP’s natural gas midstream, transportation and storage, as well as its propane, businesses are subject to stringent federal, state, and local environmental laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of permits for ETP’s operations, result in capital expenditures to manage, limit, or prevent emissions, discharges, or releases of various materials from ETP’s pipelines, plants, and facilities, and impose substantial liabilities for pollution resulting from ETP’s operations. Several governmental authorities, such as the U.S. Environmental Protection Agency, 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.

 

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ETP may incur substantial environmental costs and liabilities because the underlying risk are inherent to its operations. Joint and several, strict liability may be incurred under environmental laws and regulations in connection with discharges or releases of petroleum hydrocarbons or wastes on, under, or from ETP’s properties and facilities, many of which have been used for industrial activities for a number of years. Private parties, including the owners of properties through which ETP’s gathering systems pass or facilities where ETP’s 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. In addition, changes in environmental laws and regulations occur frequently, and any such changes that result in more stringent and costly waste handling, storage, transport disposal or remediation requirements could have a material adverse effect on our operations or financial position.

 

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

 

Users of ETP’s pipelines are dependent upon connections to and from third-party pipelines to receive and deliver natural gas and NGLs. Any reduction in the capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures or other causes could result in reduced volumes being transported in ETP’s pipelines. Similarly, if additional shippers begin transporting volumes of natural gas and NGLs over interconnecting pipelines, the allocations to existing shippers in these pipelines would be reduced, which could also reduce volumes transported in ETP’s pipelines. Any reduction in volumes transported in its 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. Its principal areas of competition include obtaining natural gas supplies for the Southeast Texas System and natural gas transportation customers for the Oasis Pipeline, the East Texas Pipeline and the ET Fuel System. ETP’s 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 Duke Energy Field Services, LLC. The East Texas Pipeline competes with other natural gas transportation pipelines that serve the Bossier Sands area in east Texas and the Barnett Shale area of the Fort Worth Basin in north Texas. The ET Fuel System competes with a number of other natural gas pipelines, including interstate and intrastate pipelines that link the Waha Hub and the Fort Worth Basin Pipeline 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. Many of ETP’s competitors have greater financial resources and access to larger natural gas supplies than it does.

 

The acquisition of the Houston Pipeline System, which will increase the number of interstate pipelines and natural gas markets to which ETP has access, will also expand its principal areas of competition to areas such as southeast Texas and the Texas Gulf Coast. As a result of ETP’s expanded market presence and diversification, it will face 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 have greater financial resources and access to larger natural gas supplies than it does.

 

ETP’s propane business competes with a number of large national and regional propane companies, and several thousand small independent propane companies. Because of the relatively low barriers to entry into the retail propane market, there is potential for small independent propane retailers, as well as other companies that may not currently be engaged in retail propane distribution, to compete with ETP’s retail outlets. As a result, it is always subject to the risk of additional competition in the future. Generally, warmer-than-normal weather further

 

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intensifies competition. Most of ETP’s propane retail branch locations compete with several other marketers or distributors in their service areas. The principal factors influencing competition with other retail propane marketers are:

 

    price;

 

    reliability and quality of service;

 

    responsiveness to customer needs;

 

    safety concerns;

 

    long-standing customer relationships;

 

    the inconvenience of switching tanks and suppliers; and

 

    the lack of growth in the industry.

 

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

 

One of the ways that ETP expects to grow 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 its control and require the expenditure of significant amounts of capital that it 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. Moreover, ETP’s 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 project’s completion. Moreover, ETP may construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize. As a result, new facilities may be unable to attract enough throughput to achieve its expected investment return, which could adversely affect its results of operations and financial condition. As a result, the success of a pipeline construction project will likely depend upon the level of natural gas exploration and development drilling activity in the areas proposed to be serviced by the project as well as ETP’s ability to obtain commitments from producers in this area to utilize the newly constructed pipelines.

 

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 us.

 

The risks of nonpayment and nonperformance by ETP’s customers is 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. Any increase in the nonpayment and nonperformance by its customers could reduce ETP’s ability to make distributions to its unitholders, including us.

 

ETP may be unable to bypass the La Grange processing plant, which could expose it to the risk of unfavorable processing margins.

 

Because of ETP’s ownership of the Oasis Pipeline, it can generally elect to bypass the La Grange processing plant when processing margins are unfavorable and instead deliver pipeline-quality gas by blending rich gas from the Southeast Texas System with lean gas transported on the Oasis Pipeline. 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 La Grange processing plant, it may have to process the rich gas. If ETP has to process when processing margins are unfavorable, its results of operations will be adversely affected.

 

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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 ETP’s 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 it serves.

 

For its fiscal year ended August 31, 2004, approximately 12% of ETP’s sales of natural gas were to industrial end-users and utilities. For the year ended December 31, 2004, approximately 36% of the Houston Pipeline System’s sales 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 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 ETP’s 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 its profitability.

 

ETP’s storage business depends on neighboring pipelines to transport natural gas.

 

To obtain natural gas, ETP’s storage business depends on the pipelines to which it has 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 ETP’s ability, and the ability of its customers, to transport natural gas to and from its facilities and a corresponding material adverse effect on its storage revenues. In addition, the rates charged by those interconnected pipelines for transportation to and from ETP’s 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 its storage revenues.

 

ETP’s pipeline integrity program may cause it to incur significant costs and liabilities.

 

In December 2003, the U.S. Department of Transportation issued a final 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.” The final rule resulted from the enactment of the Pipeline Safety Improvement Act of 2002. The final rule was effective as of January 14, 2004. Based on the results of ETP’s current pipeline integrity testing programs, it estimates that compliance with this final rule for its existing transportation assets will result in capital costs of $4.5 million during the period between 2005 to 2010, as well as operating and maintenance costs of $1.8 million during that five-year period. ETP is continuing to assess the impact of this final rule on the ET Fuel System and the Houston Pipeline System and cannot predict any estimated compliance costs for those assets at this time. 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.

 

Because weather conditions may adversely affect demand for propane, the volumes of propane sold by and the results of operations of ETP’s propane business are vulnerable to warm winters.

 

Weather conditions have a significant impact on the demand for propane for heating purposes because the majority of ETP’s 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. ETP’s propane business 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 ETP’s operating and financial results, its access

 

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Index to Financial Statements

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 it sells and the profits realized on these sales. Agricultural demand for propane is also affected by weather during the harvest season as poor harvests or dry weather reduce demand for propane used in crop drying.

 

Sudden and sharp propane price increases that cannot be passed on to customers may adversely affect the profit margins of ETP’s propane business.

 

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, the profitability of ETP’s propane business 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 that ETP pays for propane 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 the gross profits from ETP’s propane business and could, if continued over an extended period of time, reduce demand by encouraging ETP’s retail customers to conserve or convert to alternative energy sources.

 

ETP’s results of operations and its ability to make distributions or pay interest or principal on debt securities 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 that 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 ETP’s 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 ETP’s profits.

 

Some of ETP’s propane sales are pursuant to commitments at fixed prices. To mitigate the price risk related to its anticipated sales volumes under the commitments, ETP may purchase and store physical 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 ETP’s inventory and contracts for the future purchase of product could impair its profitability if its 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 estimates by ETP’s management of future events and prices and are intended to generate a profit. However, if those estimates are incorrect or other market events outside of ETP’s control occur, such activities could generate a loss in future periods and potentially impair ETP’s profitability.

 

ETP’s propane business depends on its principal propane suppliers, which increases the risk of an interruption in supply.

 

During fiscal 2004, ETP purchased approximately 24.9% of its propane from Enterprise Products Operating L.P., approximately 18.8% of its propane from Dynegy Liquids Marketing and Trade and approximately 19% of its propane from M-P Energy Partnership, the Canadian partnership in which ETP owns a 60% interest. If

 

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Index to Financial Statements

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 has originated from one of the industry’s 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 used by ETP, 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 ETP’s 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 ETP’s operations.

 

Energy efficiency and technological advances may affect the demand for propane and adversely affect ETP’s 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 ETP’s operations.

 

Risks Related to Conflicts of Interest

 

Conflicts of interest exist and may arise in the future among us, ETP and our respective general partners and affiliates. Future conflicts of interest may arise among us and the entities affiliated with any general partner interests we acquire or among ETP and such entities. For a further discussion of conflicts of interest that may arise, please read “Conflicts of Interest and Fiduciary Duties” and “Certain Relationships and Related Party Transactions—Shared Services Agreement.”

 

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

 

Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, including ETP’s general partner, on the one hand, and ETP and its limited partners, on the other hand. The directors and officers of ETP’s general partner have fiduciary duties to manage ETP in a manner 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 ETP’s 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 or that of our unitholders.

 

For example, conflicts of interest may arise in the following situations:

 

    the allocation of shared overhead expenses to ETP and us;

 

    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 ETP’s partners and the amount of cash to be reserved for the future conduct of ETP’s business;

 

    the determination whether to make borrowings under ETP’s revolving working capital facility to pay distributions to ETP’s partners; and

 

    any decision we make in the future to engage in business activities independent of ETP.

 

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

 

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

 

Our general partner’s affiliates, including the partnership that indirectly holds the other 50% of ETP’s incentive distribution rights, may compete 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. Please read “Conflicts of Interest and Fiduciary Duties” and “Certain Relationships and Related Party Transactions.”

 

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 and our unitholders, which may permit them to favor their own interests to the detriment of us and our unitholders.

 

Following this offering, conflicts of interest may arise among our general partner and its affiliates, on the one hand, and us and our unitholders, 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 the interests of our unitholders. These conflicts include, among others, the following:

 

    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 duty to our unitholders.

 

    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 to our unitholders 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.

 

    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 to our unitholders.

 

    Our general partner determines which costs incurred by it and its affiliates are reimbursable by us.

 

    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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Index to Financial Statements
    Our general partner controls the enforcement of obligations owed to us by it and its affiliates.

 

    Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

 

Please read “Certain Relationships and Related Party Transactions” and “Conflicts of Interest and Fiduciary Duties.”

 

Our partnership agreement limits our general partner’s fiduciary duties to us and our unitholders and restricts the remedies available to our unitholders 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:

 

    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;

 

    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;

 

    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

 

    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.

 

In order to become a limited partner of our partnership, our unitholders are required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

 

Our general partner has a limited call right that may require you to sell your units at an undesirable time or price.

 

If at any time our general partner and its affiliates own more than 90% of our outstanding units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering, affiliates of our general partner will own approximately 86.6% of our common units on a fully diluted basis. Please read “Description of Our Partnership Agreement—Limited Call Right.”

 

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

 

ETP has wide latitude to issue additional units on terms and conditions established by its general partner. The payment of distributions on those additional units 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 distribute to our unitholders.

 

The issuance of additional common units or other equity securities of equal rank will have the following effects:

 

    our unitholders’ proportionate ownership interest in ETP will decrease;

 

    the amount of cash available for distribution on each common unit may decrease; and

 

    the market price of our common units may decline.

 

Furthermore, our partnership agreement does not give our unitholders the right to approve our issuance of equity securities.

 

Tax Risks to Our Common Unitholders

 

You should read “Material Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of our units.

 

If we or ETP were to become subject to entity-level taxation for federal or state tax purposes, then our cash available for distribution to you would be substantially reduced.

 

The anticipated after-tax benefit of an investment in our units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this matter. The value of our investment in ETP depends largely on ETP being treated as a partnership for federal income tax purposes.

 

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Thus, treatment of us as a corporation would result in a material reduction in our anticipated cash flow and after-tax return to you, likely causing a substantial reduction in the value of our units.

 

If ETP were treated as a corporation for federal income tax purposes, 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, likely causing a substantial reduction in the value of our units.

 

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, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us or ETP as an entity, the cash available for distribution to you would be reduced.

 

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A successful IRS contest of the federal income tax positions we or ETP takes may adversely impact the market for our common units or ETP common units, and the costs of any contest will reduce cash available for distribution to our unitholders.

 

The IRS may adopt positions that differ from the positions that we or ETP take, even positions taken with the advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we or ETP take. A court may not agree with some or all of the positions we or ETP take. Any contest with the IRS may materially and adversely impact the market for our common units or ETP’s common units and the prices at which they trade. In addition, the costs of any contest with the IRS will be borne by ETP and therefore indirectly by us, as a unitholder and as the owner of the general partner of ETP. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.

 

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

 

You will be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from your share of our taxable income.

 

Tax gain or loss on the disposition of our units could be different than expected.

 

If you sell your units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those units. Prior distributions to you in excess of the total net taxable income you were allocated for a unit, which decreased your tax basis in that unit, will, in effect, become taxable income to you if the unit is sold at a price greater than your tax basis in that unit, even if the price you receive is less than your original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to you.

 

Tax-exempt entities, regulated investment companies and foreign persons face unique tax issues from owning units that may result in adverse tax consequences to them.

 

Investment in units by tax-exempt entities, such as individual retirement accounts (known as IRAs), regulated investment companies (known as mutual funds), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to them. Recent legislation treats net income derived from the ownership of certain publicly traded partnerships (including us) as qualifying income to a regulated investment company. However, this legislation is only effective for taxable years of regulated investment companies beginning after October 22, 2004. For taxable years of regulated investment companies beginning on or before October 22, 2004, very little of our income will be qualifying income to a regulated investment company. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income.

 

We will treat each purchaser of our units as having the same tax benefits without regard to the units purchased. The IRS may challenge this treatment, which could adversely affect the value of our units.

 

Because we cannot match transferors and transferees of units, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of units and could have a negative impact on the value

 

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of our units or result in audit adjustments to your tax returns. Please read “Material Tax Consequences—Uniformity of Units” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

 

You will likely be subject to state and local taxes and return filing requirements as a result of investing in our units.

 

In addition to federal income taxes, you will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we or ETP do business or own property. You will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. We or ETP may own property or conduct business in other states or foreign countries in the future. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state and local tax consequences of an investment in our units.

 

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USE OF PROCEEDS

 

We expect to receive net proceeds of approximately $266.3 million from the sale of the 15,000,000 common units we are offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we expect to receive additional net proceeds of approximately $40.3 million, which we would use to fund the redemption of 2,250,000 common units from our current equity owners. We base these amounts on an assumed initial public offering price of $19.00 per common unit, the mid-point of the range set forth on the cover page of this prospectus.

 

We will use the net proceeds from this offering to repay approximately $240 million of indebtedness outstanding under our $600 million senior secured term loan facility. This term loan facility matures on June 16, 2008 and bears interest at an initial rate of LIBOR plus 3%. This initial interest rate is subject to adjustment based upon our ratio of total debt to EBITDA, which adjustment is expected to decrease the applicable rate to LIBOR plus 2.25% by the time of the closing of this offering. The amounts borrowed under our senior secured term loan facility were distributed to our equity owners.

 

We will use the remaining net proceeds, together with an aggregate cash capital contribution of $119.7 million from our equity owners prior to the closing of this offering, to fund a portion of our acquisition of an additional 3.64 million common units of ETP.

 

If the underwriters exercise all or any portion of their over-allotment option, we will use all of the net proceeds from the sale of our common units sold pursuant to the exercise of that option to fund the redemption of an equal number of common units from our current equity owners.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization as of May 31, 2005:

 

    on a consolidated historical basis for Energy Transfer Equity;

 

    on a pro forma basis to give effect to the borrowing of $600 million by us under our senior secured term loan facility and a $119.7 million capital contribution from our existing owners; and

 

    as further adjusted to reflect the sale of 15,000,000 of our common units in this offering and the application of the net proceeds as described under “Use of Proceeds.”

 

The historical financial data of Energy Transfer Equity presented in the table below is derived from and should be read in conjunction with Energy Transfer Equity’s historical financial statements, including the accompanying notes, included elsewhere in this prospectus. Please read our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus for a complete description of the adjustments we have made to arrive at our pro forma and pro forma as adjusted capitalization data.

 

     As of May 31, 2005

     Historical

   Pro Forma

   

Pro Forma As

Adjusted


     (Dollars in thousands)

Cash and cash equivalents

   $ 21,607    $ 246,339     $ 267,946

Long-term borrowings, including current portion:

                     

ETP senior notes

     747,797              747,797

ETP swing-line loans

     30,000              30,000

ETP revolving credit facility

     443,000      (60,000 )     383,000

HOLP senior secured notes

     317,143              317,143

HOLP senior revolving acquisition facility

     41,000              41,000

HOLP long-term portion of senior revolving working

capital facility

     6,493              6,493

HOLP non-competes and other

     18,147              18,147

ETE term loan facility

     —        360,000       360,000
    

  


 

Total principal amount of debt obligations

     1,603,580      300,000       1,903,580

Minority interest

     1,257,862      106,570       1,364,432

Partners’ equity of Energy Transfer Equity:

                     

Limited partners

     413,464      (149,283 )     264,181

General partner

     4,550      (4,248 )     302

Accumulated other comprehensive income

     5,961      —         5,961
    

  


 

Total equity

     423,975      (153,531 )     270,444
    

  


 

Total capitalization

   $ 3,285,417    $ 253,039     $ 3,538,456
    

  


 

 

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DILUTION

 

Dilution is the amount by which the offering price paid by purchasers of common units sold in this offering will exceed the net tangible book value per common unit after the offering. Based on the initial public offering price of $19.00 per common unit, the mid-point of the range set forth on the cover page of this prospectus, on a pro forma as adjusted basis as of May 31, 2005, after giving effect to this offering of 15,000,000 common units, the capital contribution of $119.7 million to be made by our existing equity owners, the purchase of 3.64 million ETP common units, our net tangible book value was $(197.0) million, or $(1.69) per common unit, assuming the full exercise by the underwriters of their over-allotment option. Purchasers of common units in this offering will experience immediate and substantial dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

           $ 19.00  

Pro forma net tangible book value per common unit before this offering

   $ (5.79 )        

Increase in net tangible book value per common unit attributable to new investors

     4.10          
    


       

Less: Pro forma net tangible book value per common unit after this offering

             (1.69 )
            


Immediate dilution in net tangible book value per common unit to new investors

           $ 20.69  
            


 

The following table sets forth the number of units that we will issue and the total consideration contributed to us by our current owners and their affiliates in respect of their common units and by the purchasers of units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units Acquired

    Total Consideration

   

Average
Price

Paid Per Unit


     Number

    Percent

    Number

   Percent

   
                 (in millions)           

Current owners

   100,560,000 (1)   86.6 %   $                  %     $             

New investors

   15,000,000     12.9 %                $  

General partner units

   634,000     0.5 %                $  
    

 

 

  

 

Total

   116,194,000     100.0 %   $      100 %   $  
    

 

 

  

 


(1) Includes Class B units that are convertible into common units on a one-for-one basis at the election of the holders.

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

You should read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, please read footnote (a) to the table entitled “Estimated Cash Available to Pay Distributions Based Upon Estimated Consolidated Adjusted EBITDA” below. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and material risks inherent in our and ETP’s business. Unless otherwise stated, the information presented in this section assumes that the underwriters will exercise their option to purchase additional units in full.

 

For additional information regarding our historical and pro forma operating results, you should refer to our historical financial statements for the years ended August 31, 2004, 2003 and 2002, our historical financial statements for the nine months ended May 31, 2005 and 2004, and our unaudited pro forma condensed consolidated financial statements for the year ended August 31, 2004 and nine months ended May 31, 2005, included elsewhere in this prospectus.

 

General

 

Rationale for Our Cash Distribution Policy. Our cash distribution policy reflects a basic judgment that our unitholders will be better served by our distributing our available cash rather than retaining it. It is important that you understand that our only cash-generating assets currently consist of partnership interests, including incentive distribution rights, in ETP from which we receive quarterly distributions. We currently have no independent operations outside of our interests in ETP. Because we believe we will have relatively low cash requirements for operating expenses and that we will finance any material capital investments from external financing sources, we believe that our investors are best served by distributing all of our available cash as described below. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute to you than would be the case were we subject to tax. Our distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly.

 

Restrictions on Our Ability to Change Our Cash Distribution Policy. There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy is subject to certain restrictions and may be changed at any time. These restrictions include the following:

 

    Our distribution policy is subject to restrictions on distributions under our current term loan agreement. Specifically, our current term loan agreement contains material financial tests and covenants that we must satisfy. These financial tests and covenants are described in this prospectus under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Debt Obligations—Energy Transfer Equity.” Should we be unable to comply with the restrictions under our term loan agreement, we would be prohibited from making cash distributions to you notwithstanding our stated distribution policy.

 

    ETP’s distribution policy is subject to restrictions on distributions under its credit agreements. Specifically, ETP’s credit agreements contain material financial tests and covenants that it must satisfy. These financial tests and covenants are described in this prospectus under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Debt Obligations—Energy Transfer Partners.” Should ETP be unable to comply with the restrictions under its credit agreements, ETP would be prohibited from making cash distributions to us, which in turn would prevent us from making cash distributions to you notwithstanding our stated distribution policy.

 

    Our board of directors has broad discretion to establish reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of those reserves could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated distribution policy.

 

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Index to Financial Statements
    The board of directors of ETP’s general partner has broad discretion to establish reserves for the prudent conduct of ETP’s business and for future cash distributions to ETP’s unitholders, and the establishment of those reserves could result in a reduction in cash distributions that we would otherwise anticipate receiving from ETP, which in turn could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated distribution policy.

 

    While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including our cash distribution policy contained therein, may be amended by a vote of the holders of a majority of our common units. Following completion of this offering, our current owners will own approximately 86.6% of our outstanding common (including outstanding Class B units that are convertible into common units on a one-for-one basis at the election of the holder) and will have the ability to amend our partnership agreement. Some of these owners are officers and directors of the general partner of ETP.

 

    Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our cash distribution policy and the decision to make any distribution is at the discretion of our general partner, taking into consideration the terms of our partnership agreement.

 

    The amount of distributions paid under ETP’s cash distribution policy and the decision to make any distribution to its unitholders are at the discretion of ETP’s general partner, taking into consideration the terms of its partnership agreement.

 

    Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.

 

    We may lack sufficient cash to pay distributions to our unitholders due to increases in general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs of us or ETP and its subsidiaries.

 

Our Cash Distribution Policy Limits Our Ability to Grow. As with most other master limited partnerships, because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. In fact, since our only cash-generating assets currently consists of our partnership interests in ETP, including incentive distribution rights, our growth initially will be dependent upon ETP’s ability to increase its quarterly distribution per unit. If we issue additional units or incur debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

 

ETP’s Ability to Grow is Dependent on its Ability to Access External Growth Capital. Consistent with the terms of its partnership agreement, ETP has distributed to its partners most of the cash generated by its operations. As a result, it has relied upon external financing sources, including commercial borrowings and other debt and equity issuances, to fund its acquisition and growth capital expenditures. Accordingly, to the extent ETP is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. In addition, to the extent ETP issues additional units in connection with any acquisitions or growth capital expenditures, the payment of distributions on those additional units may increase the risk that ETP will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. The incurrence of additional commercial or other debt to finance its growth strategy would result in increased interest expense to ETP, which in turn may impact the available cash that we have to distribute to our unitholders.

 

Our Initial Distribution Rate

 

Our Cash Distribution Policy. Upon the closing of this offering, the board of directors of our general partner will adopt a policy pursuant to which we will declare an initial distribution of $0.175 per unit per complete quarter, or $0.70 per unit per year, to be paid no later than 50 days after the end of each fiscal quarter.

 

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This equates to an aggregate cash distribution of approximately $20.3 million per quarter, or $81.3 million per year, based on the common units and Class B units outstanding immediately after completion of this offering, including the common units issuable upon exercise of the underwriters’ option to purchase additional common units.

 

The table below sets forth the assumed number of outstanding common units (including the number of outstanding Class B units that are convertible into common units on a one-for-one basis) upon the closing of this offering, assuming the full exercise of the underwriters’ option to purchase additional common units, the redemption of 2,250,000 common units from our existing equity owners, and the aggregate distribution amounts payable on our outstanding common units and the general partner units during the year following the closing of this offering at our initial distribution rate of $0.175 per common unit per quarter ($0.70 per common unit on an annualized basis).

 

     Number of
Units


   Distributions

        One Quarter

   Four Quarters

Publicly held common units

   17,250,000    $ 3,018,750    $ 12,075,000

Common units held by our current owners (1)

   98,310,061      17,204,261      68,817,043

General Partner units

   634,000      111,000      443,800
    
  

  

Total

   116,194,061    $ 20,334,000    $ 81,335,843
    
  

  


(1) Includes the number of outstanding Class B units that are convertible into common units on a one-for-one basis at the election of the holders. Each Class B unit is entitled to receive the same cash distribution per quarter as each common unit.

 

These distributions will not be cumulative. Consequently, if distributions on our common units are not paid with respect to any fiscal quarter at the anticipated initial distribution rate, our unitholders will not be entitled to receive such payments in the future. We will pay our distributions within 50 days after the end of each quarter ending February, May, August and November to holders of record. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date.

 

Our distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly. Under our partnership agreement, available cash is defined to generally mean, for each fiscal quarter, cash generated from our business in excess of the amount our general partner determines is necessary or appropriate to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the upcoming four quarters.

 

ETP’s Cash Distribution Policy. Like us, ETP has adopted a cash distribution policy that requires it to distribute its available cash to its unitholders on a quarterly basis. Under ETP’s partnership agreement, available cash is defined to generally mean, for each fiscal quarter, cash generated from ETP’s business in excess of the amount its general partner determines is necessary or appropriate to provide for the conduct of its business, to comply with applicable law, any of its debt instruments or other agreements or to provide for future distributions to its unitholders for any one or more of the upcoming four quarters. ETP’s determination of available cash takes into account the desire to establish cash reserves in some quarterly periods that it may use to pay cash distributions in other quarterly periods, thereby enabling it to maintain relatively consistent cash distribution levels even if its business experiences fluctuations in its cash from operations due to seasonal and cyclical factors. ETP’s determination of available cash also allows it to maintain reserves to provide funding for its growth opportunities. ETP makes its quarterly distributions from cash generated from its operations, and those distributions have grown over time as its business has grown, primarily as a result of several significant acquisitions and internal growth projects that have been funded through external financing sources.

 

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Index to Financial Statements

The following table sets forth, for the periods indicated, the amount, record date and payment date of the quarterly cash distributions ETP paid per each ETP common unit with respect to the quarter indicated. All distributions paid by ETP to date have consisted of available cash from operating surplus of ETP under ETP’s partnership agreement. The actual cash distributions of ETP (i.e., payments to the partners of ETP) occur within 45 days after the end of such quarter. ETP and its predecessor have had an established historical record of paying quarterly cash distributions to their partners.

 

     Cash Distribution History

     Per Unit

   Record Date

   Payment Date

2003                 

1st Quarter

   $ 0.31875    December 30, 2002    January 14, 2003

2nd Quarter

     0.31875    April 4, 2003    April 14, 2003

3rd Quarter

     0.31875    July 7, 2003    July 15, 2003

4th Quarter

     0.32500    October 8, 2003    October 15,2003
2004                 

1st Quarter

   $ 0.32500    December 30, 2003    January 14, 2004

2nd Quarter

     0.35000    April 2, 2004    April 14, 2004

3rd Quarter

     0.37500    July 2, 2004    July 15, 2004

4th Quarter

     0.41250    October 7, 2004    October 15, 2004
2005                 

1st Quarter

   $ 0.43750    January 5, 2005    January 14, 2005

2nd Quarter

     0.46250    April 6, 2005    April 14, 2005

3rd Quarter

     0.48750    July 8, 2005    July 15, 2005

4th Quarter

     0.5000    September 30, 2005    October 14, 2005

 

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our initial distribution rate of $0.175 per common unit per quarter. In those sections, we present two tables, including:

 

    “Unaudited Pro Forma Consolidated Available Cash,” in which we present the amount of available cash we would have had for our fiscal year ended August 31, 2004, giving pro forma effect to:

 

    the business combination in January 2004 with Heritage Propane Partners;

 

    the acquisition in June 2004 by ETP of the midstream natural gas assets of TXU Fuel Company, a gas transportation subsidiary of TXU Corp., which included approximately 2,000 miles of gathering and mainline pipeline systems, four natural gas treating plants, condensate stabilization facilities, fractionation facilities and a natural gas processing plant and the related debt and equity financings by ETP to pay the purchase price for this acquisition;

 

    the issuance by ETP of $750.0 million of 5.95% senior notes on January 18, 2005 and the application of the net proceeds from that issuance to repay outstanding indebtedness under ETP’s secured credit facilities;

 

    the acquisition in January 2005 by ETP of the controlling interests in the companies that own the Houston Pipeline System, consisting of approximately 4,200 miles of intrastate natural gas pipelines and related storage and transportation facilities located in Texas and the related debt and equity financings by ETP to pay the purchase price for this acquisition;

 

    our new term loan in the aggregate principal amount of $600.0 million, the payment of related expenses and the distribution of the net proceeds of such borrowings to our unitholders in June 2005;

 

    the issuance by ETP of $400.0 million of 5.65% senior notes on July 29, 2005 and the application of net proceeds from that issuance to repay outstanding indebtedness under ETP’s revolving credit facility, to fund ETP’s recently announced capital expansion projects and for general partnership purposes;

 

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Index to Financial Statements
    a $119.7 million equity contribution from our existing partners;

 

    the current ETP cash distributions of $0.50 per unit per quarter (or $2.00 per unit on an annualized basis); and

 

    this offering and the application of the net proceeds as described under “Use of Proceeds.”

 

    “Estimated Cash Available to Pay Distributions Based Upon Estimated Consolidated Adjusted EBITDA,” in which we present the operating assumptions for the four fiscal quarters ending August 31, 2006, which we believe will enable us to fully fund our intended distribution.

 

Our tables entitled “Unaudited Pro Forma Consolidated Available Cash” and “Estimated Cash Available to Pay Distributions Based Upon Estimated Consolidated Adjusted EBITDA” used in this section as described below have been prepared by, and are the responsibility of, our management. Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information contained in this section, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, the prospective financial information. Such independent registered public accounting firms’ reports included elsewhere in this prospectus relate to the appropriately described historical financial information contained in this section. Such reports do not extend to the tables and related information contained in this section and should not be read to do so. In addition, such tables and information were not prepared:

 

    with a view toward compliance with published guidelines of the Securities and Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information;

 

    in accordance with accounting principles generally accepted in the United States of America; or

 

    in accordance with procedures applied under the auditing standards of the Public Company Accounting Oversight Board (United States).

 

Our pro forma available cash for fiscal 2004 and for the nine months ended May 31, 2005 would have been more than sufficient to pay the initial quarterly distribution of $0.175 per unit on all units to be outstanding following the completion of this offering.

 

If we had completed the transactions contemplated in this prospectus on September 1, 2003, pro forma available cash generated during our fiscal year ended August 31, 2004 would have been approximately $92.1 million. This amount would have been more than sufficient to pay the full initial distribution amount of $81.3 million on all our common units, Class B units and general partner units for this year.

 

If we had completed the transactions contemplated in this prospectus on September 1, 2004, our pro forma available cash for the nine months ended May 31, 2005 would have been approximately $94.4 million. This amount would have been more than sufficient to pay the full initial distribution amount of $61.0 million on all our common units, Class B units and general partner units for this nine-month period.

 

The following table illustrates, on a pro forma basis, for our fiscal year ended August 31, 2004 and for the nine months ended May 31, 2005, the amount of available cash that would have been available for distributions to our unitholders, assuming in each case that this offering had been consummated at the beginning of such period. Each of the pro forma adjustments presented below is explained in the footnotes to such adjustments. In particular, as reflected in footnote (d) below, you should be aware that “Pro forma acquisition adjustment to Consolidated Adjusted EBITDA” includes adjustments for ETP’s business combination with Heritage on January 20, 2004, ETP’s acquisition of TXU Fuel Company on June 1, 2004 and ETP’s acquisition of 98% of the general partner and limited partner interests of HPL Consolidation LP (“HPL”) on January 26, 2005.

 

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Index to Financial Statements

Energy Transfer Equity, L.P.

Unaudited Pro Forma Consolidated Available Cash

 

     Year Ended
August 31, 2004


    Nine Months
Ended
May 31, 2005


 
     (in thousands)  

Net Cash Provided (Used) by Operating Activities (a)

   $ 122,098     $ 216,859  

Plus:

                

Cash interest expense

     37,971       47,862  

Cash interest income

     —         —    

Cash tax expense

     7,227       5,586  

Non-cash gain (loss) on sale of property, plant and equipment

     (1,006 )     (665 )

Provision for doubtful accounts

     (1,667 )     (4,781 )

Net changes in working capital accounts, including net changes in price risk management assets and liabilities (b)

     (10,389 )     (43,746 )
    


 


Consolidated Adjusted EBITDA (on a cash basis)

   $ 154,234     $ 221,115  

Less: Additional expense of being a public company (c)

     (1,695 )     (1,309 )

Plus: Pro forma acquisition adjustment to Consolidated Adjusted EBITDA (d)

     93,261       23,375  
    


 


Pro forma Consolidated Adjusted EBITDA

   $ 245,800     $ 243,181  

Less:

                

Pro forma cash interest expense (e)

     (116,463 )     (81,143 )

Pro forma cash tax expense (f)

     (10,915 )     (6,194 )

Maintenance capital expenditures (g)

     (47,267 )     (28,778 )

Growth capital expenditures (h)

     (94,180 )     (93,541 )

Principal payments on debt (i)

     (38,309 )     (32,505 )

Distributions to non-affiliated owners of ETP (j)

     (148,221 )     (111,166 )

Distributions to Energy Transfer Investments

     (26,750 )     (20,063 )

Plus:

                

Borrowings under ETP credit facilities for growth capital expenditures (k)

     94,180       93,541  

Proceeds from issuances of ETP common units

     234,258       131,040  
    


 


Pro forma available cash of Energy Transfer Equity

   $ 92,133     $ 94,373  
    


 


Expected Cash Distributions:

                

Expected Distribution per Unit

   $ 0.70     $ 0.70  
    


 


Distributions to Public Common Unitholders (l)

   $ 12,075     $ 9,056  

Distributions to Common Units and Class B Units Held by Existing Owners

     68,817       51,613  
    


 


Distributions to General Partner Units

     444       333  
    


 


Total Distributions

   $ 81,336     $ 61,002  
    


 


Excess

   $ 10,797     $ 33,371  
    


 


Debt Covenant Ratios:

                

Energy Transfer Partners

                

Total Funded Debt / Consolidated EBITDA (m)

     3.41 x     3.51 x

Consolidated EBITDA / Consolidated Interest Expense (m)

     3.30 x     3.83 x

Energy Transfer Equity

                

Total Funded Debt / Consolidated EBITDA (n)

                

Consolidated EBITDA / Consolidated Interest Expense (n)

                

(a) Reflects net cash provided (used) by operating activities of Energy Transfer Equity, L.P., derived from its historical consolidated financial statements for the periods indicated without giving pro forma effect to the transaction described in footnote (d).

 

(b) ETP maintains two revolving credit facilities that have an aggregate of $875 million in borrowing availability. ETP uses these revolving credit facilities to satisfy its working capital needs which allows it to avoid using cash flow from operations to satisfy its working capital needs. Therefore, we do not reflect any adjustments to cash available for distributions as a result of these requirements.

 

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(c) Reflects an adjustment to our Consolidated Adjusted EBITDA for approximately $2.5 million in incremental ongoing annual expenses associated with being a public company, including, among other things, estimated incremental accounting and audit fees, director and officer liability insurance and other miscellaneous fees.

 

(d) Reflects pro forma adjustments for the business combination with Heritage on January 20, 2004, ETP’s acquisition of TXU Fuel Company on June 1, 2004 and ETP’s acquisition of 98% of the general partner and limited partner interests in HPL on January 26, 2005. The results of operations for these transactions are reflected in our historical consolidated operating results beginning on the day we closed the transaction. We have included the results of these transactions in our results on a pro forma basis as if, for the fiscal year ended August 31, 2004, the transactions occurred on September 1, 2003 and, for the nine month period ended May 31, 2005, as if the transactions occurred on September 1, 2004. Please see the Energy Transfer Equity, L.P. and Subsidiaries Unaudited Pro Forma Consolidated Financial Statements beginning on page F-4. The pro forma financial data should not be considered indicative of the historical results we would have had or the future results that we will have after this offering. We have set forth below a summary of our pro forma EBITDA adjustments to reflect these transactions:

 

    Fiscal Year Ended August 31, 2004

 
    Energy
Transfer
Equity, L.P.


    Heritage

  Heritage
Holdings


    TXU Fuel
Company


  HPL

    Adjustments

    Pro Forma

 

Net income

  $ 450,217     $ 22,644   $ 3,319     $ 16,122   $ (187,385 )   $ (280,666 )   $ 24,251  

Gain on Heritage Transaction

    (395,253 )     —       —         —       —         395,253       0  

Depreciation and amortization

    56,242       15,389     —         3,986     12,037       18,022       105,676  

Interest expense

    41,217       12,754     —         884     40       64,814       119,709  

Income taxes expense

    2,792       20     2,245       9,881     (66,428 )     56,763       5,273  

Non-cash compensation expense

    42       1,232     —         —       —         —         1,274  

Interest income and other

    (516 )     66     (346 )     138     (3,050 )     346       (3,362 )

(Gain) loss on disposal of assets

    1,006       240     —         —       —         (100 )     1,146  

Minority interests

    —         178     —         —       —         —         178  

Depreciation, amortization and interest of investee

    440       322     —         —       —         —         762  

Depreciation, amortization and interest of discontinued operations

    2,249       —       —         —       —         —         2,249  

Depreciation, amortization and interest of minority interest

    —         —       —         —       —         (5,459 )     (5,459 )
   


 

 


 

 


 


 


Consolidated Adjusted EBITDA

  $ 158,436     $ 52,845   $ 5,218     $ 31,011   $ (244,786 )   $ 248,973     $ 251,697  
   


 

 


 

 


 


 


    Nine Months Ended May 31, 2005

 
    Energy
Transfer
Equity, L.P.


    HPL

    Adjustments

    Pro Forma

 

Net income

  $ 121,879     $ 32,232     $ (47,016 )   $ 107,095  

Gain on sale of discontinued operations, net of income tax expense

    (104,562 )     —         —         (104,562 )

Minority interest expense on gain on sale of discontinued operations

    49,686       —         —         49,686  

Depreciation and amortization

    76,874       4,953       3,707       85,534  

Interest expense

    66,350       866       32,415       99,631  

Income tax expense on continuing operations

    5,168       15,608       (15,000 )     5,776  

Other (income) expense, net

    (67 )     (4,390 )     —         (4,457 )

Non-cash compensation expense

    1,206       —         —         1,206  

Loss on disposal of assets

    665       —         —         665  

Depreciation, amortization and interest of investee

    493       —         —         493  

Depreciation, amortization and interest of discontinued operations

    1,547       —         —         1,547  

Depreciation, amortization and interest of minority interest

    (7,578 )     —         —         (7,578 )

Loss on extinguishment of debt

    6,550       —         —         6,550  
   


 


 


 


Consolidated Adjusted EBITDA

  $ 218,211     $ 49,269     $ (25,894 )   $ 241,586  
   


 


 


 


 

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(e) Reflects an annualized increase to interest expense of approximately $78.5 million as a result of interest expense related to: (i) ETP’s issuance of $750 million of its 5.95% senior notes on January 18, 2005 and the application of the net proceeds therefrom to repay other indebtedness of ETP, (ii) additional borrowings by ETP during the fiscal year ended August 31, 2004 and the nine months ended May 31, 2005 to finance ETP’s business combination with Heritage on January 20, 2004, ETP’s acquisition of TXU Fuel Company on June 1, 2004 and ETP’s acquisition of controlling interests in HPL on January 26, 2005, under ETP’s credit facilities at a weighted average interest rate of approximately 4.7%, (iii) our term loan borrowing dated June 16, 2005 of $600.0 million less the assumed paydown amount of $240 million at a weighted average interest rate of approximately 6.0%, and (iv) this offering and the resulting use of proceeds, including the full exercise of the underwriters’ option to purchase additional common units.

 

(f) In computing our estimated cash tax expense for the fiscal year ended August 31, 2004 and the nine months ended May 31, 2005, we have given effect to the current quarterly distributions of $0.50 per unit by ETP and we have considered the flow through nature of taxable income from ETP.

 

(g) Includes actual maintenance capital expenditures of $22.5 million and $25.0 million for the fiscal year ending August 31, 2004 and the nine months ended May 31, 2005, respectively. Also includes estimated additional maintenance capital expenditures of $12.0 million and $3.8 million for the fiscal year ended August 31, 2004 and the nine months ended May 31, 2005, respectively, to integrate the operations of recently completed acquisitions, including ETP’s acquisition of TXU Fuel Company and controlling interests in HPL. The estimated additional maintenance capital expenditures are derived based on our experience in integrating acquisitions as well as the specific characteristics of the businesses we have acquired.

 

(h) Reflects growth capital expenditures for the fiscal year ended August 31, 2004 of $87.1 million as adjusted for the business combination with Heritage on January 20, 2004, ETP’s acquisition of TXU Fuel Company on June 1, 2004 and ETP’s acquisition of 98% of the general partner and limited partner interests in HPL on January 26, 2005 and $93.5 million for the nine months ended May 31, 2005. The growth capital expenditures for the fiscal year ended August 31, 2004 include $67.0 million associated with capital expenditures related to ETP’s East Texas Pipeline expansion project. The growth capital expenditures for the nine months ended May 31, 2005 include capital expenditures of approximately $30.9 million related to ETP’s Fort Worth Basin expansion project. Growth capital expenditures do not include cash amounts paid in connection with acquisitions.

 

(i) Reflects the principal payments on ETP’s indebtedness for the fiscal year ended August 31, 2004 and the nine months ended May 31, 2005, respectively. These principal payments were refinanced through borrowings under ETP’s credit facilities.

 

(j) Reflects the cash distributions from ETP to its unitholders other than us based upon the current quarterly distributions of $0.50 per unit ($2.00 per unit on an annualized basis).

 

(k) Reflects borrowings incurred under ETP’s revolving credit facility (the “ETP Revolving Credit Facility”) to finance its growth capital expenditures. Because ETP distributes substantially all of its available cash on a quarterly basis, ETP has historically financed its growth capital expenditures through the use of external financing alternatives, including borrowings under its credit facilities and the public and private capital markets. In the future, ETP anticipates that it will continue to utilize these external sources of financing to fund its acquisition growth strategy and expects to refinance all of its debt as it matures. After giving effect to this offering, including the full exercise of the overallotment option, our consolidated principal debt maturities for each of the fiscal years ended August 31 would be as follows (in millions):

 

2006

   $ 39.2

2007

   $ 86.7

2008

   $ 45.9

2009

   $ 43.1

2010

   $ 513.6

Thereafter

   $ 847.3

 

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(l) The table below sets forth the assumed number of outstanding common units, Class B units and general partner units upon the closing of this offering and the estimated aggregate distribution amounts payable on such units during the year following the closing of this offering at our initial distribution rate.

 

     Number of
Units


   Annual
Distributions


Estimated distributions on publicly held common units

   17,250,000    $ 12,075,000

Estimated distributions on common units and Class B units held by our existing owners

   98,310,061      68,817,043

Estimated distributions on general partners units

   634,000      443,800
    
  

Total

   116,194,061    $ 81,335,843
    
  

 

(m) The ETP Revolving Credit Facility requires that, on the last day of each of ETP’s fiscal quarters, the ratio of ETP’s Consolidated Funded Debt (as defined in the credit agreement relating to the ETP Revolving Credit Facility) to ETP’s Consolidated EBITDA (as defined in the credit agreement relating to the ETP Revolving Credit Facility) for the four fiscal quarters most recently ended must be no greater than 4.50 to 1.00 except that, on the last day of any fiscal quarter in which ETP or its subsidiaries makes an acquisition with a purchase price of $50.0 million or more, such ratio must be no greater than 5.0 to 1.0. You should note that ETP’s Consolidated Debt to ETP’s Consolidated EBITDA for purposes of ETP’s financial covenants includes only the operations of ETP and its subsidiaries and excludes our operations and those of our subsidiaries that are not subsidiaries of ETP. In addition, this facility requires that the ratio of ETP’s Consolidated EBITDA (as defined in the credit agreement relating to the ETP Revolving Credit Facility) to ETP’s Consolidated Interest Expense (as defined in the credit agreement relating to the ETP Revolving Credit Facility) for the four fiscal quarters most recently ended must not be less than 3.0 to 1.0. ETP satisfied its leverage ratio covenants for the fiscal year ended August 31, 2004 and for the nine months ended May 31, 2005 and therefore was permitted to make the cash distributions at the levels it distributed during these periods.

 

(n) Our term loan agreement requires that, on the last day of the specified fiscal quarter, the ratio of our Consolidated Funded Debt (as defined in our term loan agreement) to our Consolidated EBITDA (as defined in our term loan agreement) for the fiscal quarter most recently ended, multiplied by four, be no greater than 6.25 to 1.0 for the fiscal quarter ending August 31, 2005 and declining over time to no greater than 4.0 to 1.0 for the fiscal quarter ending May 31, 2008. Our term loan agreement also requires that, on the last day of the specified fiscal quarter, the ratio of our Consolidated EBITDA (as defined in our term loan agreement) to our Consolidated Interest Expense (as defined in our term loan agreement) must not be less than 2.25 to 1.0 for the fiscal quarter ending August 31, 2005 and increasing over time to not less than 3.0 to 1.0 for the fiscal quarter ending May 31, 2008. Following completion of this offering, we expect to enter into a new credit facility, which will provide us with a $100.0 million revolving line of credit. This facility is exclusively for our use and may not be drawn on by ETP. This facility is expected to have a 36-month maturity with quarterly interest payments required but no required principal payments until maturity. The new credit facility is expected to include terms substantially similar to those existing for our term loan described in this prospectus.

 

As a result of the factors described in “Estimated Consolidated Adjusted EBITDA,” “Estimated Cash Available to Pay Distributions Based Upon Estimated Consolidated Adjusted EBITDA,” and “Assumptions and Considerations” below, we believe we will be able to pay an initial quarterly distribution of $0.175 per unit for each quarter in the year following consummation of this offering.

 

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Estimated Consolidated Adjusted EBITDA

 

In order to fund distributions to our common unitholders at our initial rate of $0.175 per unit per complete quarter, our Consolidated Adjusted EBITDA for the year following this offering must be at least $459.3 million. We define Consolidated Adjusted EBITDA as earnings before income taxes, plus the following items:

 

    net interest expense (inclusive of write-off of deferred financing costs, interest expense related to make whole premium charge, less gain from termination of interest rate swap agreement and interest income);

 

    interest of non-controlling partners in ETP’s net income;

 

    gain on issuance of units of ETP;

 

    depreciation and amortization expense; and

 

    compensation charges for issuances of ETP units to ETP’s employees.

 

Gain (loss) on sales of property, plant and equipment and provisions for doubtful accounts are considered non-cash items within Net Cash Provided (Used) by Operating Activities in our statement of cash flows and are also excluded for purposes of determining Estimated Consolidated Adjusted EBITDA. Similarly, changes in working capital accounts are not included in the Estimated Consolidated Adjusted EBITDA, and therefore are reconciling items in the reconciliation of Net Cash Provided (Used) by Operating Activities and Estimated Consolidated Adjusted EBITDA. Non-cash compensation expense represents charges for the value of the common units awarded under ETP’s compensation plans that have not yet vested under the terms of those plans and are charges which do not, or will not, require cash settlement.

 

Consolidated Adjusted EBITDA should not be considered an alternative to net income, income before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with accounting principles generally accepted in the United States as those items are used to measure operating performance, liquidity or ability to service debt obligations.

 

In the table below entitled “Estimated Cash Available to Pay Distributions Based Upon Estimated Consolidated Adjusted EBITDA,” we estimate that our Consolidated Adjusted EBITDA will be at least $459.3 million for the four fiscal quarters ended August 31, 2006. We refer to this amount as our “Estimated Consolidated Adjusted EBITDA.” We have also determined that if our Estimated Consolidated Adjusted EBITDA for such period is at or above our estimate, we would be permitted to make cash distributions under the restricted payments covenants in our term loan agreement at the initial distribution rate of $0.175 per unit per quarter for such period, and ETP would be permitted under its credit facilities to pay sufficient cash distributions to us to enable us to make distributions to our unitholders at this level.

 

In developing our Estimated Consolidated Adjusted EBITDA, we have included maintenance and growth capital expenditures for the four fiscal quarters ended August 31, 2006. Maintenance capital expenditures are capital expenditures made on an ongoing basis to maintain current operations, which do not increase operating capacity or revenues from existing levels. Growth capital expenditures consist of capital expenditures we expect to make to expand the operating capacity of our current operations. While we have presented additional borrowings to fund growth capital expenditures, we have not presented the additional cash flow we would expect to realize as a result of such expenditures.

 

You should read footnote (a) to the table below for a discussion of the material assumptions underlying our belief that we will be able to generate our Estimated Consolidated Adjusted EBITDA. Our belief is based on several assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect to take. While we believe that these assumptions are reasonable in light of our current expectations regarding future events, the assumptions underlying our Estimated Consolidated Adjusted EBITDA are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If our assumptions are

 

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not realized, the actual available cash that we generate could be substantially less than that currently expected and could, therefore, be insufficient to permit us to make distributions on the common units at the initial distribution rate, or at any level, in which event the market price of the common units may decline materially. Consequently, the statement that we believe that we will have sufficient available cash to pay the initial distribution on the common units for each quarter through August 31, 2006 should not be regarded as a representation by us or the underwriters or any other person that we will declare and make such a distribution.

 

When reading this section, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our financial condition and consolidated results of operations to vary significantly from those set forth in “Estimated Cash Available to Pay Distributions Based Upon Estimated Consolidated Adjusted EBITDA” below.

 

Energy Transfer Equity, L.P.

Estimated Cash Available to Pay Distributions Based Upon

Estimated Consolidated Adjusted EBITDA

 

    

Twelve Months
Ending

August 31, 2006


     (dollars in thousands,
except per unit data)

Estimated Consolidated Adjusted EBITDA (a)

   $ 459,334

Less:

      

Cash interest expense (b)

     138,866

Estimated principal payments on debt (c)

     39,200

Estimated cash income taxes (d)

     7,000

Maintenance capital expenditures (e)

     37,000

Growth capital expenditures (f)

     500,000

Acquisition capital expenditures (g)

     20,000

Distributions to non-affiliated owners of ETP (i)

     148,221

Distributions to Energy Transfer Investments (i)

     26,750

Plus:

      

Borrowings for acquisitions (j)

     20,000

Net borrowings under loan agreements (j)

     388,039

Proceeds from equity offering (h)

     131,000
    

Available Cash of Energy Transfer Equity

     81,336
    

Expected Cash Distributions by Energy Transfer Equity

     81,336
    

Expected distribution per common unit

     0.700
    

Distributions to our general partner

     444

Distributions to our public common unitholders

     12,075

Distributions to common units and Class B units held by our pre-existing owners

     68,817
    

Total distributions (k)

   $ 81,336
    

Debt Covenant Ratios:

      

Energy Transfer Partners

      

Total Funded Debt/Consolidated EBITDA (l)

     3.84x

Consolidated EBITDA/Consolidated Interest Expense (l)

     4.49x

Energy Transfer Equity

      

Total Funded Debt/Consolidated EBITDA (m)

     4.63x

Consolidated EBITDA/Consolidated Interest Expense (m)

     3.70x

 

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(a) We believe that our Estimated Consolidated Adjusted EBITDA for the twelve months ending August 31, 2006 will be not less than $459.3 million. This amount of Estimated Consolidated Adjusted EBITDA is approximately $203 million more than the pro forma Consolidated Adjusted EBITDA we generated for the fiscal year ended August 31, 2004. In order for us to generate the Estimated Consolidated Adjusted EBITDA, we believe that ETP must achieve a minimum base level of $461.5 million in EBITDA.

 

  Our minimum base level estimate of $459.3 million in Consolidated Adjusted EBITDA for the twelve months ending August 31, 2006 is intended to be an indicator or benchmark of the amount management considers to be the lowest amount of Consolidated Adjusted EBITDA needed to generate sufficient available cash to make cash distributions to our common unitholders at our initial distribution rate of $0.175 per common unit per quarter (or $0.70 per common unit on an annualized basis). The baseline estimates of Consolidated Adjusted EBITDA should not be viewed as management’s projection of operating earnings of us or ETP. Our management believes that our actual financial performance during the twelve months ending August 31, 2006 will exceed the minimum base level amount. To calculate our baseline estimate of Consolidated Adjusted EBITDA for the estimated period, we have intentionally excluded the EBITDA of the significant growth capital projects that ETP has previously announced.

 

Our Estimated Consolidated Adjusted EBITDA is based on a number of significant assumptions that are set forth below:

 

    ETP will pay a quarterly cash distribution of $0.50 per ETP common unit for each of the four quarters in the four-quarter period ending August 31, 2006, which quarterly distribution amount is equal to the most recently declared cash distribution of $0.50 per ETP common unit for the quarter ended August 31, 2005. As a result, we estimate that the amount of cash distribution that we receive from ETP will be equal to or greater than $26.4 million during this period. We have also assumed that Energy Transfer Partners GP will maintain its 2% general partner interest in ETP by making proportionate cash contributions to ETP in connection with ETP’s equity issuances.

 

    ETP will sell a minimum of 270 MMBtu/d of natural gas and a minimum of 400 bbls/d of NGLs in its midstream segment for the fiscal year ending August 31, 2006, as compared to the 2,893 MMBtu/d of natural gas and 13 bbls/d of NGLs sold on a pro forma basis for the fiscal year ending August 31, 2004 and 2,565 MMBtu/d of natural gas and 15 bbls/d of NGLs transported on a pro forma basis for the fiscal year ending August 31, 2003.

 

    ETP will transport a minimum of 3,750 MMBtu/d of natural gas in its transportation segment for the fiscal year ending August 31, 2006, as compared to the 2,950 MMBtu/d of natural gas transported on a pro forma basis for the fiscal year ending August 31, 2004 and 2,871 MMBtu/d of natural gas transported on a pro forma basis for the fiscal year ending August 31, 2003.

 

    ETP will sell a minimum of 420 million retail gallons of propane for fiscal year ending August 31, 2006, as compared to the 400 million retail gallons sold on a pro forma basis for the fiscal year ending August 31, 2004 and 376 million retail gallons sold on a pro forma basis for the fiscal year ending August 31, 2003.

 

    ETP will realize EBITDA of not less than $75 million from its midstream segment, $275 million from its transportation segment and $125 million from its retail propane segment for the fiscal year ended August 31, 2006 as compared to $79.2 million from its midstream segment, $63.7 million from its transportation segment and $114.5 million from its retail propane segment for the fiscal year ended August 31, 2004 and $57.0 million from its midstream segment, $20.0 million from its transportation segment and $110.9 million from its retail propane segment for the fiscal year ended August 31, 2003.

 

    ETP will not experience net customer losses during our fiscal year ending August 31, 2006.

 

    ETP will experience a number of heating degree days no less than the 15-year average of heating degree days in its area of operations for our fiscal year ending August 31, 2006.

 

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    ETP’s maintenance capital expenditures will not exceed $37 million for the fiscal year ending August 31, 2006 as compared to ETP’s maintenance capital expenditures of $34.5 million and $22.6 million on a pro forma basis for our fiscal years ended August 31, 2004 and 2003, respectively.

 

    ETP’s growth capital expenditures will not exceed $500 million for the fiscal year ending August 31, 2006 as compared to ETP’s growth capital expenditures of $87.2 million and $4.2 million on a pro forma basis for our fiscal year ended August 31, 2004 and 2003, respectively.

 

    We and ETP will remain in compliance with the restrictive financial covenants in our existing and future debt agreements such that our ability to pay distributions to our partners will not be encumbered.

 

    Our average interest rates will not exceed the rates we have assumed, which range between 5.5% and 6.0%, and our consolidated cash interest expense will not exceed approximately $138.9 million for the fiscal year ending August 31, 2006.

 

    We and ETP will be able to access equity capital markets and be able to obtain financing arrangements to support our commercial goals, including growth capital expenditures, on reasonable terms.

 

    Our incremental general and administrative expenses associated with public company reporting and filing requirements will not exceed $2.5 million for the fiscal year ending August 31, 2006.

 

    There will not be any new federal, state or local regulation of portions of the energy industry in which we and ETP operate, or an interpretation of existing regulation, that will be materially adverse to our or ETP’s business.

 

    There will not be any major adverse change in the portions of the energy industry in which we and ETP operate resulting from supply or production disruptions, reduced demand for our products or services, or from significant changes in the market prices of natural gas or NGLs.

 

    Market, regulatory, insurance and overall economic conditions will not change substantially.

 

We cannot assure you that any of the assumptions summarized above, or any other assumptions upon which Estimated Consolidated Adjusted EBITDA is based, will prove to be correct. If the assumptions are incorrect, we may not have sufficient cash to make the contemplated distributions.

 

(b) Our estimated consolidated cash interest expense assumes cash interest expense for the next four quarters to be approximately $138.9 million. Our cash interest is comprised of the following components:

 

  (i) Approximately $21.6 million associated with the outstanding borrowings under our term loan which is expected to have approximately $360.0 million outstanding after the application of $240.0 million of the net proceeds of this offering to repay a portion of the outstanding borrowings under the term loan. The term loan bears interest at a LIBOR-based floating rate currently assumed to be approximately 2.25% on average through August 31, 2006.

 

  (ii) Approximately $44.6 million of interest expense associated with ETP’s $750.0 million of 5.95% senior unsecured notes.

 

  (iii) Approximately $22.6 million of interest expense associated with ETP’s $400.0 million of 5.65% senior unsecured notes.

 

  (iv) Approximately $18.4 million of interest expense related to borrowings under ETP’s current credit agreement, including interest expense of additional $15.0 million in interest expense related to borrowings primarily related to growth capital expenditures and the additional interest associated with the annual commitment fee of approximately 0.3% on the $325.0 million of available revolving credit under ETP’s credit facility. We expect that ETP will finance all of its growth capital expenditures through borrowings under its credit facilities.

 

  (v)

Approximately $24.7 million of interest expense related to various series of senior secured notes issued by a subsidiary of ETP based on the scheduled interest payments payable during the period and the

 

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fixed annual interest rates ranging from 7.17% to 8.87% per annum. The aggregate unpaid principal amount of these notes as of August 31, 2006 is projected to be $262.6 million based on the scheduled repayments of principal on these notes during the period.

 

  (vi) Approximately $6.0 million of interest expense in other ETP borrowings at various rates of interest.

 

(c) Represents $39.2 million of principal payments on ETP’s indebtedness. As noted in footnote (j) below, ETP expects to fund these principal payments with borrowings under its credit facilities. After giving effect to this offering, including the full exercise of the overallotment option, and the borrowings of $388.0 million related to expected growth capital expenditures, our consolidated principal payment requirements for each of the fiscal years ending August 31 would be as follows (in thousands):

 

2006

    $39.2

2007

    $86.7

2008

    $45.9

2009

    $43.1

2010

  $513.6

Thereafter

  $847.3

 

    In addition, it is our expectation that our existing debt and ETP’s existing debt will be refinanced as it matures, and therefore no repayments of debt are presented in the table.

 

(d)   Our annual income tax expense is the result of the federal income tax obligations of our consolidated subsidiaries. In computing our estimated cash income tax expense, we have considered distributions to us from ETP based upon the current quarterly distribution rate of $0.50 per unit for each quarter during the four-quarter period ending August 31, 2006 and the flow-through nature of taxable income from ETP.

 

(e)   We currently expect that our consolidated maintenance capital expenditures will be approximately $37.0 million for the fiscal year ending August 31, 2006 in comparison to $22.5 million and $25.0 million in the fiscal year ended August 31, 2004 and the nine month period ended May 31, 2005, respectively. The increased expected maintenance capital expenditures for the fiscal year ending August 31, 2006 primarily reflects increased pipeline integrity inspections and repairs.

 

(f)   This reflects our anticipated expenditure of $500.0 million for growth capital for the fiscal year ending August 31, 2006. During the fiscal year ended August 31, 2004 and the nine-month period ended May 31, 2005, we expended a significantly lower level of growth capital on projects associated with, among other things, the construction of the East Texas Pipeline and the Fort Worth Basin Pipeline.

 

    Our anticipated consolidated growth capital expenditures of approximately $500 million for the fiscal year ending August 31, 2006, which consists primarily of capital expenditures related to ETP’s recently announced expansion projects involving the construction of approximately 264 miles of pipeline and the addition of approximately 40,000 horsepower of compression that will increase pipeline transportation access for the natural gas producers in the Bossier Sands and Barnett Shale basins in east and north Texas of various intrastate and interstate markets.

 

(g)

Consistent with its acquisition strategy, ETP is continuously pursuing strategic acquisitions that it expects to be accretive to its earnings. Since the inception of ETP’s predecessor in 1996 and through May 31, 2005, ETP has acquired three significant natural gas transportation pipeline systems for aggregate consideration of approximately $1.6 billion and approximately 105 propane-related acquisitions for aggregate consideration of approximately $720 million. While ETP expects to continue to pursue acquisitions during its fiscal year ending August 31, 2006, because of the uncertain nature of the acquisition environment, we have only included an estimate of future retail propane acquisition capital expenditure requirements. If ETP is successful in completing additional acquisitions, ETP anticipates its primary source of consideration will be through commercial borrowings, other debt and common unit issuances. While the initial funding of its acquisitions may consist of debt financing, ETP’s financial strategy is to finance acquisitions equally with equity and debt, and ETP would expect to repay such debt with proceeds of equity issuances to achieve this

 

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relatively balanced financing ratio. If ETP is unable to finance its growth through external sources or is unable to achieve its targeted debt/equity ratios our cash available to pay distributions may be negatively impacted.

 

(h) Represents the proceeds of an equity issuance of 3,640,000 ETP common units at $36.00 per unit, net of fees and expenses.

 

(i) Reflects the cash distributions from ETP to its unitholders, other than us and Energy Transfer Investments, based upon the current quarterly distribution of $0.50 per unit for each quarter during the four-quarter period ending August 31, 2006, or $2.00 per unit on an annualized basis, and based upon the assumption that we purchase 3.64 million common units of ETP upon the closing of this offering.

 

(j) As ETP has historically financed internal growth and acquisitions through the use of external financing sources, including borrowings under its credit facilities and the issuance of debt and equity securities, and anticipates continuing to do so, we have shown estimated borrowings for these purposes as a source of cash in the table above. Specifically, we expect that ETP will borrow the $408.0 million necessary for its projected $388.0 million of growth capital expenditures and $20.0 million of acquisitions for its fiscal year ended August 31, 2006.

 

(k) Represents the amount required to fund distributions to our unitholders for four quarters based upon our initial cash distribution rate of $0.175 per unit ($0.70 per unit annually) and assuming the underwriters’ option to purchase additional common units has been exercised in full.

 

(l) The ETP Revolving Credit Facility requires that the ratio of ETP’s Consolidated Funded Debt (as defined in the credit agreement relating to the ETP Revolving Credit Facility) to ETP’s Consolidated EBITDA for the four fiscal quarters most recently ended must be no greater than 4.50 to 1.00 except that, on the last day of any fiscal quarter in which ETP or its subsidiaries makes an acquisition with a purchase price of $50.0 million or more, such ratio must be no greater than 5.0 to 1.0. You should note that ETP’s Consolidated Funded Debt to ETP’s Consolidated EBITDA for purposes of ETP’s financial covenants includes only the operations of ETP and its subsidiaries and excludes our operations and those of our subsidiaries that are not subsidiaries of ETP. In addition, this Revolving Credit Facility requires that the ratio of ETP’s Consolidated EBITDA to ETP’s Consolidated Interest Expense (as defined in the credit agreement relating to the ETP Revolving Credit Facility) for the four fiscal quarters most recently ended must not be less than 3.0 to 1.0. As indicated in the table, ETP’s Consolidated EBITDA would have been sufficient to satisfy the ratios required by the ETP Revolving Credit Facility and permit the payment to us of cash distributions sufficient to enable us to make our intended distribution.

 

(m) Our term loan agreement requires that, on the last day of the specified fiscal quarter, the ratio of our Consolidated Funded Debt (as defined in our term loan agreement) to our Consolidated EBITDA for the fiscal quarter most recently ended, multiplied by four, be no greater than 6.25 to 1.0 for the fiscal quarter ending August 31, 2005 and declining over time to no greater than 4.0 to 1.0 for the fiscal quarter ending May 31, 2008. Our term loan agreement also requires that, on the last day of the specified fiscal quarter, the ratio of our Consolidated EBITDA to our Consolidated Interest Expense must not be less than 2.25 to 1.0 for the fiscal quarter ending August 31, 2005 and increasing over time to not less than 3.0 to 1.0 for the fiscal quarter ending May 31, 2008. Following the completion of this offering, we expect to enter into a new credit facility that will provide us with a $100.0 million revolving line of credit. This facility is exclusively for our use and may not be drawn on by ETP. This facility is expected to have a 36-month maturity with quarterly interest payments required but no required principal payments until maturity. The credit facility is expected to include terms substantially similar to those existing in our term loan agreement described in this prospectus.

 

Assumptions and Considerations

 

We believe that our partnership interests, including incentive distribution rights, in ETP will generate sufficient cash flow to enable us to pay our initial quarterly distribution of $0.175 per unit on all of our units for

 

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the four quarters ending August 31, 2006. Our belief is based on a number of current assumptions that we believe to be reasonable over the next four quarters. While we believe that these assumptions are generally consistent with the actual performance of ETP and are reasonable in light of our current beliefs concerning future events, the assumptions are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If our assumptions are not realized, the actual available cash that ETP generates, and thus the cash we would receive from our ownership of ETP’s general partner interest, incentive distribution rights and common units, could be substantially less than that currently expected and could, therefore, be insufficient to permit us to make our initial quarterly and annual distributions on our units, in which event the market price of our units may decline materially. Consequently the statement that we believe that we will have sufficient available cash to pay the initial distribution on our units for each quarter through August 31, 2006 should not be regarded as a representation by us or the underwriters or any other person that we will make such a distribution. When reading this section, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” in this prospectus.

 

Our Sources of Distributable Cash

 

Our only cash-generating assets currently consist of our partnership interests in ETP. Therefore, our cash flow and resulting ability to make distributions initially will be completely dependent upon the ability of ETP to make distributions in respect of those interests and rights. The actual amount of cash that ETP will have available for distribution will primarily depend on the amount of cash it generates from operations. The actual amount of this cash will fluctuate from quarter to quarter based on certain factors, including:

 

    fluctuations in cash flow generated by ETP’s operating activities;

 

    the level of capital expenditures ETP makes;

 

    the cost of capital used to fund any acquisitions;

 

    debt service requirements;

 

    fluctuations in working capital needs;

 

    restrictions on distributions contained in ETP’s credit facility and senior notes;

 

    ETP’s ability to borrow under its working capital facility to make distributions;

 

    prevailing economic conditions; and

 

    the amount, if any, of cash reserves established by ETP’s general partner in its discretion for the proper conduct of its business.

 

As ETP makes quarterly distributions of available cash from operating surplus to its partners, we receive our share of such distributions in proportion to our ownership interests in ETP. Upon completion of this offering, we will own, directly or indirectly:

 

    a 100% membership interest in Energy Transfer Partners, LLC, the general partner of Energy Transfer GP, L.P., which currently owns a 2% general partner interest in ETP;

 

    36,413,840 ETP common units, representing approximately 33% of the outstanding common units in ETP; and

 

    50% of the ETP incentive distribution rights, which entitles us to receive our pro rata share of any cash distributed by ETP as certain target distribution levels are reached in excess of $0.25 per ETP unit in any quarter.

 

Our Incentive Distribution Rights Related to ETP’s Cash Distributions. The incentive distribution rights we own in ETP represent our right to receive an increasing percentage of ETP’s quarterly distributions of available

 

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cash from operating surplus after ETP has made cash distributions in excess of its first target distribution level. If for any quarter ETP has distributed available cash from operating surplus to ETP common unitholders in an amount equal to the minimum quarterly distribution of ETP, then ETP will distribute any additional available cash from operating surplus for that quarter among ETP unitholders, ETP’s general partner and the holder of ETP’s incentive distribution rights in the following manner:

 

    First, 98% to all ETP unitholders, pro rata, and 2% to ETP’s general partner, until each ETP unitholder receives a total of $0.275 per unit for that quarter (the “first target distribution”);

 

    Second, 85% to all ETP unitholders, pro rata, 2% to ETP’s general partner and 13% to the holders of the incentive distribution rights, pro rata, until each ETP unitholder receives a total of $0.3175 per ETP unit for that quarter (the “second target distribution”);

 

    Third, 75% to all ETP unitholders, pro rata, 2% to ETP’s general partner and 23% to the holders of the incentive distribution rights, pro rata, until each ETP unitholder receives a total of $0.4125 per ETP unit for that quarter (the “third target distribution”); and

 

    Thereafter, 50% to all ETP unitholders, pro rata, 2% to ETP’s general partner and 48% to the holder of the incentive distribution rights, pro rata.

 

For a further description of ETP’s cash distribution policy, see “Energy Transfer Partners’ Cash Distribution Policy.”

 

Hypothetical Allocations of Distributions to Our Unitholders and ETP’s Unitholders. The table set forth below illustrates the percentage allocations among (i) the owners of ETP, other than us, and (ii) Energy Transfer Equity, L.P. as a result of certain assumed quarterly distribution payments per common unit made by ETP, including the target distribution levels contained in ETP’s partnership agreement. This information assumes:

 

    ETP has 110,534,514 total units outstanding, representing the number of ETP units outstanding at the closing of this offering; and

 

    our ownership of (i) 36,413,840 ETP common units, comprising approximately 33% of the outstanding common units in ETP, (ii) the 2% general partner interest in ETP and (iii) 50% of the incentive distribution rights of ETP.

 

The percentage interests shown for us and the other ETP unitholders for the minimum quarterly distribution amount are also applicable to distribution amounts that are less than the minimum quarterly distribution. The amounts presented below are intended to be illustrative of the way in which we are entitled to an increasing share of distributions from ETP as total distributions from ETP increase and are not intended to represent a prediction of future performance.

 

Distribution Level


   ETP Quarterly
Distribution
Per Unit


   Distributions to Owners of
ETP Other Than Us as a
Percentage of Distributions


    Distributions to Energy
Transfer Equity, L.P. as a
Percentage of Total
Distributions (1)


 

Minimum Quarterly Distribution

   $ 0.2500    65.6 %   34.4 %

First Target Distribution

   $ 0.2750    65.6 %   34.4 %

Second Target Distribution

   $ 0.3175    63.3 %   36.7 %

Third Target Distribution

   $ 0.4125    61.7 %   38.3 %

Other Hypothetical Distributions

   $ 0.5000    57.5 %   42.5 %

(1) Includes distributions made with respect to our ownership of the 2% general partner interest in ETP, our ownership of 33% of ETP’s limited partnership interests and our ownership of 50% of the incentive distribution rights of ETP.

 

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PARTNERSHIP AGREEMENT PROVISIONS

RELATING TO CASH DISTRIBUTIONS

 

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

 

General

 

Our partnership agreement requires that, within 50 days after the end of each quarter beginning with the quarter ending August 31, 2005, we distribute all of our available cash to the holders of record of our common units and Class B units on the applicable record date.

 

Definition of Available Cash

 

Available cash is defined in our partnership agreement and generally means, with respect to any calendar quarter, all cash on hand at the end of such quarter:

 

    less the amount of cash reserves necessary or appropriate in the reasonable discretion of our general partner to:

 

    satisfy general, administrative and other expenses and debt service requirements;

 

    permit Energy Transfer Partners GP to make capital contributions to ETP in order to maintain its 2% general partner interest as required by ETP’s partnership agreement upon the issuance of additional partnership securities by ETP;

 

    comply with applicable law or any debt instrument or other agreement;

 

    provide funds for distributions to unitholders and our general partner in respect of any one or more of the next four quarters; and

 

    otherwise provide for the proper conduct of our business;

 

    plus all cash on hand immediately prior to the date of the distribution of available cash for the quarter resulting from working capital borrowings made after the end of the quarter. Working capital borrowings are generally borrowings that are made under our credit facility and in all cases are used solely for working capital purposes or to pay distributions to partners.

 

Class B Units

 

As of the closing of this offering, we will have              Class B units outstanding which had been issued under our Class B Unit Incentive Plan. See “Management—Energy Transfer Equity—Executive and Incentive Compensation.” Each Class B unit will represent a limited partner interest in us and will be entitled to receive quarterly cash distributions in the same amount as the quarterly cash distributions we make on each common unit. Each Class B unit will be allocated a portion of our income, gain, loss, deduction and credit in a pro rata basis with each common unit, and each Class B unit will be entitled to receive distributions upon liquidation in the same manner as each common unit. Each Class B unit will also have the same voting rights as a common unit. Each Class B unit will be convertible into one common unit at the election of the holder of the Class B unit. The Class B units will not be subject to vesting. The Class B units, unlike the common units, will have a zero initial capital account balance.

 

General Partner Interest

 

As of the date of this offering, our general partner will be entitled to 0.50% of all distributions that we make prior to our liquidation. This general partner interest will be represented by 634,000 general partner units. The

 

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general partner’s initial 0.50% interest in these distributions will be proportionately reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 0.50% general partner interest. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest.

 

Adjustments to Capital Accounts

 

We will make adjustments to capital accounts upon the issuance of additional units. In doing so, we will allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the adjustments to the unitholders and the general partner in the same manner as we allocate gain or loss upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, we will allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner which results, to the extent possible, in the general partner’s capital account balances equaling the amount which they would have been if no earlier positive adjustments to the capital accounts had been made.

 

Distributions of Cash upon Liquidation

 

If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called a liquidation. We will first apply the proceeds of liquidation to the payment of our creditors in the order of priority provided in the partnership agreement and by law and, thereafter, we will distribute any remaining proceeds to the unitholders and our general partner in accordance with their respective capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

 

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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

 

The table on the following page shows selected consolidated financial data for Energy Transfer Equity, L.P. and selected pro forma financial and operating data for the partnership after giving effect to material acquisitions and transactions as described below, in each case for the periods and as of the dates indicated. The selected historical statement of operations and cash flow data for the eleven months ended August 31, 2003 and the year ended August 31, 2004 and the balance sheet data as of August 31, 2003 and 2004 are derived from our audited financial statements. The selected historical statement of operations and cash flow data for the nine months ended September 30, 2002 and for the years ended December 31, 2000 and 2001 and balance sheet data as of September 30, 2002 and as of December 31, 2001 are derived from the audited financial statements of Aquila Gas Pipeline, the predecessor to Energy Transfer Partners. The selected historical statement of operations and cash flow data for the year ended December 31, 1999 and the balance sheet data as of December 31, 1999 and 2000 are from the unaudited consolidated financial statements of Aquila Gas Pipeline. The statement of operations, balance sheet, and cash flow data as of and for the nine months ended May 31, 2004 and 2005, are derived from our unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal, recurring accruals, which we consider necessary for fair presentation of our financial position and results of operations for these periods.

 

We have had no independent operating activities apart from those conducted by ETP, and at present our cash flows solely consist of distributions from ETP on the partnership interests, including the incentive distribution rights, that we own. Accordingly, the selected historical consolidated financial data set forth in the table on the following page primarily reflects the operating activities and results of operations of ETP. We reflect our ownership interest in ETP on a consolidated basis, which means that our financial results are combined with ETP’s financial results and the results of our other subsidiaries. The interest owned by non-controlling partners in ETP is reflected as a liability on our balance sheet, and the non-controlling partner’s share of income for ETP is reflected as an expense in our results of operations.

 

Our selected historical consolidated financial data includes the effect of the acquisitions ETP made during these periods from the date of each acquisition, but not on a pro forma or full period basis.

 

The unaudited summary pro forma statement of operations data for the year ended August 31, 2004 and for the nine months ended May 31, 2005 reflect our consolidated historical operating results as adjusted to give pro forma effect to the following transactions as if these transactions occurred on September 1, 2003:

 

    our business combination in January 2004 with Heritage Propane Partners, L.P., which we refer to as “Heritage;”

 

    the acquisition in June 2004 by ETP of the TXU Fuel Company from TXU Corp. and the related debt and equity financings by ETP to pay the purchase price for this acquisition;

 

    the acquisition in January 2005 by ETP of the controlling interests in the companies that own the Houston Pipeline System and the related debt and equity financings by ETP to pay the purchase price for this acquisition;

 

    our new term loan in the aggregate principal amount of $600.0 million, the payment of related expenses and the distribution of the net proceeds of such borrowings to our unitholders in June 2005;

 

    the transfer of Class B limited partner interests in ETP GP to Energy Transfer Investments and to us, which entitle ETI and us to each receive 50% of the cash distributions attributable to the ownership of ETP’s incentive distribution rights;

 

    a capital contribution of $119.7 million to be made by our equity owners prior to the closing of this offering; and

 

    this offering and the application of the net proceeds of $266.3 million and related expenses as described under “Use of Proceeds.”

 

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The unaudited pro forma summary balance sheet data as of May 31, 2005 reflect our consolidated historical balance sheet data as adjusted to give pro forma affect to the following transactions, in each case as if the following transactions occurred on May 31, 2005:

 

    our new term loan in the aggregate principal amount of $600.0 million, the payment of related expenses and the distribution of the net proceeds of such borrowings to our unitholders in June 2005;

 

    the transfer of Class B limited partner interests in ETP GP to Energy Transfer Investments and to us, which entitle ETI and us to each receive 50% of the cash distributions attributable to the ownership of ETP’s incentive distribution rights;

 

    a capital contribution of $119.7 million to be made by our equity owners prior to the closing of this offering; and

 

    this offering and the application of the net proceeds of $266.3 million and related expenses as described under “Use of Proceeds.”

 

For a description of all of the assumptions used in preparing the summary pro forma financial and operating data, you should read the notes to the pro forma financial statements for Energy Transfer Equity, L.P. The pro forma financial and operating data should not be considered as indicative of the historical results we would have had or the future results that we will have after this offering.

 

We derived the data in the following table from, and it should be read together with and is qualified in its entirety by reference to, the consolidated financial statements and the accompanying notes included in this prospectus. The Consolidated Statements of Operations for the years ended August 31, 2003 and 2004 have been restated to account for the sale of ETP’s Oklahoma gathering, treating and processing assets as discontinued operations. Operating results for the nine months ended May 31, 2005 are not necessarily indicative of the results that may be expected for our entire fiscal year ending August 31, 2005. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Historical (a)

    Pro Forma

 
    Aquila Gas Pipeline

    Energy Transfer Equity

 
    Year Ended December 31,

   

Nine Months

Ended

September 30,

2002


   

Eleven Months

Ended

August 31,

2003


   

Year
Ended

August 31,

2004


   

Year

Ended

August 31,

2004


 
    1999

    2000

    2001

         
    (unaudited)     (in thousands except per unit data)     (unaudited)  

Statement of Operations Data:

                                                       

Revenues

  $ 1,030,554     $ 1,758,530     $ 1,813,850     $ 933,099     $ 931,027     $ 2,346,957     $ 6,350,022  

Gross profit

    94,109       117,663       98,589       53,035       105,589       365,533       679,026  

Depreciation and amortization

    27,061       30,049       30,779       22,915       11,870       56,242       105,676  

Operating income

    30,795       31,024       42,990       2,862       55,501       130,806       219,490  

Other income (expense):

                                                       

Interest expense

    (12,894 )     (12,098 )     (6,858 )     (3,931 )     (12,453 )     (41,217 )     (119,709 )

Gain on Energy Transfer Transactions

    —         —         —         —         —         395,253       —    

Minority interests in income from continuing operations

    —         —         —         —         —         (35,164 )     (76,122 )

Income from continuing operations before income tax (benefit) expense

    17,502       18,892       41,161       4,272       44,673       449,551       26,064  

Income tax (benefit) expense (c)

    (5,913 )     (7,657 )     (15,403 )     (467 )     (4,432 )     (2,792 )     (5,273 )
   


 


 


 


 


 


 


Income from continuing operations

  $ 11,589     $ 11,235     $ 25,758     $ 3,805     $ 40,241     $ 446,759     $ 20,791  
   


 


 


 


 


 


 


Income from continuing operations per
share/unit (d)

    —         —         —         —       $ 0.25     $ 2.47     $ 0.18  

Cash distribution per share/unit

    —         —         —         —       $ 0.03     $ 1.37          
Balance Sheet Data (end of period):   (unaudited)     (unaudited)                                

Total assets

  $ 620,920     $ 724,161     $ 633,260     $ 601,528     $ 604,140     $ 2,865,191          

Current liabilities

    160,419       313,506       194,816       144,076       169,967       404,917          

Long-term debt

    163,273       110,721       66,250       66,250       196,000       1,071,158          

Stockholders’ equity/partners’ capital

    237,877       254,248       249,520       254,259       182,631       368,325          

 

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    Historical (a)

    Pro Forma

    Aquila Gas Pipeline

    Energy Transfer Equity

    Year Ended December 31,

   

Nine Months

Ended

September 30,

2002


   

Eleven Months

Ended

August 31,

2003


   

Year
Ended

August 31,

2004


   

Year

Ended

August 31,

2004


    1999

    2000

    2001

         
    (unaudited)     (in thousands except per unit data)     (unaudited)
Other Financial Data:   (unaudited)                                    

EBITDA, as adjusted (unaudited) (3)

  $ 57,457     $ 61,039     $ 78,798     $ 31,118     $ 77,382     $ 108,436     $ 264,363

Net cash provided by operating activities

    43,182       76,011       65,198       12,987       70,223       122,098        

Net cash used in investing activities

    (13,785 )     (23,459 )     (20,727 )     (487 )     (340,806 )     (731,831 )      

Net cash provided by (used in) financing activities

    (34,544 )     (52,552 )     (44,471 )     (12,500 )     325,655       637,513        

Capital expenditures:

                                                     

Maintenance and growth

    19,166       21,965       28,866       5,486       13,872       109,688        

Acquisition

            1,980               0       337,148       681,835        

 

     Energy Transfer Equity

 
     Consolidated Historical

    Pro Forma

 
    

For the Nine Months

Ended May 31,


   

For the Nine Months

Ended May 31,


 
     2004

     2005

    2005

 
     (in thousands)  

Statement of Operations Data:

                         

Revenues

   $ 1,591,656      $ 4,335,791     $ 6,004,015  

Gross Profit:

     245,809        579,713       665,189  

Depreciation and amortization

     32,793        76,874       85,534  

Operating income

     106,999        234,904       275,529  

Interest expense

     (25,111 )      (66,350 )     (99,631 )

Gain on Energy Transfer Transactions

     320,893        —         —    

Minority interest in income from continuing operations

     (32,170 )      (91,439 )     (114,745 )

Income from continuing operations before income taxes

     371,282        70,047       58,459  

Income tax expense (c)

     (3,861 )      (5,168 )     (5,776 )
    


  


 


Income from continuing operations

     367,421        64,879       52,683  

Net income from continuing operations per share/unit

     2.10        0.33          

Balance Sheet Data (end of period):

                         

Total assets

   $ 2,247,760      $ 4,522,355     $ 4,775,394  

Current liabilities

     1,018,670        1,015,618       1,015,618  

Long-term debt

     698,343        1,570,155       1,870,155  

Stockholders’ equity/partners’ capital

     307,619        423,975       270,444  

 

     Consolidated Historical for Energy Transfer Equity

     For the Nine Months Ended May 31,

     2004

   2005

     (in thousands)

Other Financial Data:

             

EBITDA, as adjusted (unaudited)(e)

   $ 111,715    $ 218,211

Net cash provided by operating activities

     135,180      216,850

Net cash used in investing activities

     210,279      1,038,645

Net cash provided by (used in) financing activities

     86,445      760,550

(a) We were formed in September 2002 as La Grange Energy, L.P., a Texas limited partnership. On January 20, 2004, we and Heritage completed a series of transactions which, among other things, included:

 

    we contributed our subsidiary La Grange Acquisition, L.P., and its subsidiaries and affiliates who conducted business under the assumed name of Energy Transfer Company, or ETC OLP, to Heritage in exchange for cash, assumption of certain liabilities and three classes of securities; and

 

    we acquired the general partner of Heritage from its owners.

 

 

We refer to these transactions as the “Energy Transfer Transactions.” The Energy Transfer Transactions were accounted for as a reverse acquisition in accordance with Statement of Financial Accounting Standards

 

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No. 141, “Business Combinations” (SFAS 141). Although Heritage was the surviving parent entity for legal purposes, ETP was the acquirer for accounting purposes. As a result, our historical financial statements are the historical financial statements of the combined company. In February 2005, we changed our name to Energy Transfer Company, L.P. In August 2005, we converted from a Texas limited partnership to a Delaware limited partnership and changed our name from Energy Transfer Company, L.P. to Energy Transfer Equity, L.P.

 

(b) On December 27, 2002, we purchased the remaining 50% of Oasis Pipe Line Company. Prior to December 27, 2002, the interest in Oasis Pipe Line was treated as an equity method investment. After that date, Oasis Pipe Line’s results of operations were consolidated with our results of operations as a wholly owned subsidiary.

 

(c) As a partnership, we are not subject to income taxes. However, our subsidiaries, Oasis Pipe Line, Heritage Holdings, Inc. and Heritage Service Corporation, are corporations that are subject to income taxes. Prior to 2003, Oasis Pipe Line was an equity method investment of ETC OLP, and taxes were netted against the equity method earnings. Aquila Gas Pipeline was a tax-paying corporation, and as such recognized income taxes related to its earnings in all periods presented.

 

(d) Net income per unit is computed by dividing the limited partners’ interest in net income by the weighted average number of units outstanding.

 

(e) EBITDA, as adjusted, is defined as our earnings before interest, taxes, depreciation (adjusted for depreciation directly attributable to minority interests), amortization and other non-cash items, such as compensation charges for unit issuances to employees, gain or loss on disposal of assets, gain or loss on discontinued operations (net of minority interests), gain on the Energy Transfer Transactions and other expenses. We present EBITDA, as adjusted, on a partnership basis, which includes both the general and limited partner interests. Non-cash compensation expense represents charges for the value of the common units awarded under ETP’s compensation plans that have not yet vested under the terms of those plans and are charges which do not, or will not, require cash settlement. Non-cash income or loss such as the gain or loss arising from our disposal of assets, discontinued operations, and the gain on the Energy Transfer Transactions are not included when determining EBITDA, as adjusted. EBITDA, as adjusted, (i) is not a measure of performance calculated in accordance with generally accepted accounting principles and (ii) should not be considered in isolation or as a substitute for net income, income from operations or cash flow as reflected in our consolidated financial statements.

 

  EBITDA, as adjusted, is presented because such information is relevant and is used by management, industry analysts, investors, lenders and rating agencies to assess the financial performance and operating results of the partnership’s fundamental business activities. Management believes that the presentation of EBITDA, as adjusted, is useful to lenders and investors because of its use in the natural gas and propane industries and for master limited partnerships as an indicator of the strength and performance of our ongoing business operations, including the ability to fund capital expenditures, service debt and pay distributions. Additionally, management believes that EBITDA, as adjusted, provides additional and useful information to our investors for trending, analyzing and benchmarking our operating results from period to period as compared to other companies that may have different financing and capital structures. The presentation of EBITDA, as adjusted, allows investors to view the partnership’s performance in a manner similar to the methods used by management and provides additional insight to our operating results.

 

 

EBITDA, as adjusted, is used by management to determine our operating performance, and along with other data as internal measures for setting annual operating budgets, assessing financial performance of our numerous business locations, as a measure for evaluating targeted businesses for acquisition and as a measurement component of incentive compensation. We have a large number of business locations located in different regions of the United States. EBITDA, as adjusted, can be a meaningful measure of financial performance because it excludes factors which are outside the control of the employees responsible for operating and managing the business locations, and provides information management can use to evaluate the performance of the business locations, or the region where they are located, and the employees responsible for operating them. To present EBITDA, as adjusted, on a full partnership basis, we add back the minority interest of the general partner because net income per limited partner unit is reported net of the

 

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general partner’s minority interest. Our EBITDA, as adjusted, includes non-cash compensation expense which is a non-cash expense item resulting from our unit based compensation plans that does not require cash settlement and is not considered during management’s assessment of the operating results of our business. The inclusion of these non-cash compensation expenses in EBITDA, as adjusted, allows management to compare our operating results to those of other companies in the same industry who may have compensation plans with levels and values of annual grants that are different than ETP’s. Other expenses include other finance charges and other asset non-cash impairment charges that are reflected in the partnership’s operating results but are not classified in interest, depreciation and amortization. We do not include gain on the sale of assets when determining EBITDA, as adjusted, since including non-cash income resulting from the sale of assets increases the performance measure in a manner that is not related to the true operating results of our business. In addition, our debt agreements contain financial covenants based on EBITDA, as adjusted. For a description of these covenants, please read Note 5 to our consolidated financial statements included in this prospectus.

 

  There are material limitations to using a measure such as EBITDA, as adjusted, including the difficulty associated with using it as the sole measure to compare the results of one company to another, and the inability to analyze certain significant items that directly affect a company’s net income or loss. In addition, our calculation of EBITDA, as adjusted, 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. EBITDA, as adjusted, for the periods described herein is calculated in the same manner as presented by us in the past. Management compensates for these limitations by considering EBITDA, as adjusted, in conjunction with its analysis of other GAAP financial measures, such as gross profit, net income (loss), and cash flow from operating activities. A reconciliation of EBITDA, as adjusted, to net income (loss) is presented below. Please read “Reconciliation of EBITDA, As Adjusted, to Net Income” below.

 

Reconciliation of EBITDA, as Adjusted

 

The following tables set forth the reconciliation of EBITDA, as adjusted, to our net income for the periods indicated:

 

    Historical

    Pro Forma

 
    Aquila Gas Pipeline

    Energy Transfer Equity

 
    Year Ended December 31,

  Nine Months
Ended
September 30,
2002


    Eleven
Months
Ended
August 31,
2003


    Year
Ended
August 31,
2004


    Year
Ended
August 31,
2004


 
    1999

  2000

  2001

       
    (in thousands)  

Net income

  $ 11,589   $ 11,235   $ 25,758   $ 4,739     $ 46,235     $ 450,217     $ 24,251  

Gain on Heritage Transaction

    —       —       —       —         —         (395,253 )     —    

Depreciation and amortization

    27,061     30,049     30,779     22,915       11,870       56,242       105,676  

Interest expense

    12,894     12,098     6,858     3,931       12,453       41,217       119,709  

Income tax expense

    5,913     7,657     15,403     (467 )     4,432       2,792       5,272  

Non-cash compensation expense

    —       —       —       —         —         42       1,274  

Interest income and other

    —       —       —       —         (202 )     (516 )     (3,362 )

(Gain) loss on disposal of assets

    —       —       —       —                 1,006       1,146  

Minority interests

    —       —       —       —                 —         178  

Equity in earnings of investees

    —       —       —       —         1,003                  

Depreciation, amortization and interest of investee

    —       —       —       —                 440       762  

Depreciation, amortization and interest of discontinued operations

    —       —       —       —         1,591       2,249       2,249  

Depreciation, amortization and interest of minority interests

    —       —       —       —         —         —         (5,459 )
   

 

 

 


 


 


 


EBITDA, as adjusted

  $ 57,457   $ 61,039   $ 78,798   $ 31,118     $ 77,382     $ 158,436     $ 251,696  
   

 

 

 


 


 


 


 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of Energy Transfer Equity’s financial condition and results of operations in conjunction with the historical and pro forma consolidated financial statements and notes thereto included elsewhere in this prospectus. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the historical and pro forma financial statements included elsewhere in this prospectus. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding some of the risks inherent in our and ETP’s businesses.

 

Overview

 

General. We are a Delaware limited partnership. In addition to directly owning approximately 33% of Energy Transfer Partners’ outstanding common units, we indirectly own and control the general partner of ETP, through which we hold the 2% general partnership interest and 50% of the incentive distribution rights in ETP. ETP is a publicly traded limited partnership that is primarily engaged in the natural gas midstream, transportation and storage business and also has a national retail propane business.

 

ETP has increased its quarterly distribution on its common units 16 times since its initial public offering in 1996. On September 2, 2005, ETP increased its quarterly distribution to $0.50 per unit of ETP per quarter for the quarter ended August 31, 2005 (or $2.00 per unit of ETP on an annualized basis). Under ETP’s current capital structure, a distribution of $0.50 per unit will result in a quarterly distribution to us of approximately $26.4 million, consisting of $18.2 million in respect of our ownership of ETP’s common units, $1.5 million in respect of our indirect ownership of the 2% general partner interest in ETP, and $6.7 million in respect of our indirect ownership of 50% of ETP’s incentive distribution rights. We forecast that our partnership interests in ETP will generate $105.4 million in cash to us for the fiscal year ending August 31, 2006, assuming a $2.00 per unit annual distribution.

 

Our primary business objective is to increase our cash distributions to our unitholders by actively assisting ETP in executing its business strategy. We intend to support ETP in implementing its business strategy by assisting ETP in identifying, evaluating, and pursuing growth opportunities. In the future, we may also support the growth of ETP through the use of our capital resources, which could involve loans, capital contributions or other forms of credit support to ETP. This funding could be used for the acquisition by ETP of a business or asset or for an internal growth project. In addition, the availability of this capital could assist ETP in arranging financing for a project, reducing its financing costs or otherwise supporting a merger or acquisition transaction.

 

ETP’s primary objective is to increase the level of its cash distributions over time by pursuing a business strategy that is currently focused on growing its intrastate natural gas midstream business (including transportation, gathering, compression, treating, processing, storage and marketing) and its national propane business through, among other things, pursuing construction and expansion opportunities relating to its existing infrastructure and acquiring additional businesses or assets.

 

Our aggregate partnership interests in ETP consist of the following:

 

    the 2% general partner interest in ETP, which we own through our ownership interests in Energy Transfer Partners GP;

 

    50% of the outstanding incentive distribution rights in ETP, which we own through our ownership of equity interests in Energy Transfer Partners GP; and

 

    approximately 36.4 million common units of ETP (including 3.64 million common units of ETP which we will purchase at the closing of the offering), all of which we hold directly.

 

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Index to Financial Statements

The following table sets forth the distributions that we have received from ETP during the periods indicated and reflects our partnership interests, including our incentive distribution rights, as of the dates indicated after giving effect to our current structure.

 

     Cash Distributions Received by Us
from ETP


     Year Ended
August 31,
2004


  

Nine Months
Ended May 31,

2005


     (in thousands)

Distributions on ETP common units held by us

   $ 20,411    $ 41,693

Distributions from ownership interest in the ETP general partner

     1,392      3,062

Distributions from ETP incentive distribution rights

     1,811      8,756
    

  

Total

   $ 23,614    $ 53,511
    

  

 

Factors That Significantly Affect our Results. Our only cash-generating assets currently consist of our partnership interests in ETP. Therefore, our cash flow and resulting ability to make distributions initially will be completely dependent upon the ability of ETP to make distributions in respect of those interests and rights. The actual amount of cash that ETP will have available for distribution will primarily depend on the amount of cash it generates from operations.

 

ETP’s results from the midstream segment are determined primarily by the volumes of natural gas gathered, compressed, treated, processed, purchased and sold through ETP’s pipeline and gathering systems and the level of natural gas and NGL prices. ETP generates its midstream revenues and gross margins principally under fee-based arrangements or other arrangements. Under fee-based arrangements, it receives a fee for natural gas gathering, compressing, treating or processing services. The revenue it earns from these arrangements is directly related to the volume of natural gas that flows through its systems and is not directly dependent on commodity prices. The terms of its contracts vary based upon gas quality conditions, the competitive environment at the time the contracts are signed and customer requirements. Many of these contracts remain in effect for several years. The 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.

 

Results from ETP’s transportation and storage segment are determined primarily by the amount of capacity its customers reserve as well as the actual volume of natural gas that flows through its transportation pipelines. Under transportation contracts, ETP charges its customers (1) 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 ETP even if the customer does not transport natural gas on the respective pipeline, (2) a transportation fee, which is based on the actual throughput of natural gas by the customer, or (3) a fuel retention based on a percentage of gas transported on the pipeline, or a combination of the three, generally payable monthly. The transportation and storage segment also generates its 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 Houston Pipeline System.

 

ETP’s propane-related segments are margin-based businesses 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. Product supply contracts are one-year agreements subject to annual renewal and generally permit suppliers to charge posted prices (plus transportation costs) at the time of delivery or the current prices established at major delivery points. In particular, ETP’s propane distribution business is largely seasonal and dependent upon weather conditions in its service areas.

 

In addition, the actual amount of cash that ETP will have available for distribution will fluctuate from quarter to quarter based on many additional factors, including:

 

    fluctuations in cash flow generated by ETP’s operating activities;

 

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    the level of capital expenditures ETP makes;

 

    the cost of capital used to fund any acquisitions;

 

    debt service requirements;

 

    fluctuations in working capital needs;

 

    restrictions on distributions contained in ETP’s credit facility and senior notes;

 

    ETP’s ability to borrow under its working capital facility to make distributions;

 

    prevailing economic conditions; and

 

    the amount, if any, of cash reserves established by ETP’s general partner in its discretion for the proper conduct of its business.

 

Ability to Independently Pursue Opportunities. In addition to assisting ETP in identifying, evaluating and pursuing growth opportunities, we may separately pursue opportunities to acquire businesses or construct assets when, for example, these opportunities:

 

    do not fit within ETP’s then-current strategy;

 

    arise at a time when ETP has capital constraints in its credit agreements or other reasons; or

 

    are not economically justified for ETP at the time.

 

A transaction might not be economically justified for ETP, if, for example, the expected timing of the cash flow from the project, the level of cash flow accretion during the early stages of the project or the anticipated capital costs of the project would adversely impact ETP’s ability to make cash distributions. If we pursue such a project, our results of operations and ability to make distributions to our common unitholders could be negatively impacted.

 

If we are successful in independently pursuing a project, we may offer to transfer or may sell the project to ETP if the project is complementary to ETP’s then-current strategy or operations. If the project is not complementary to ETP’s strategy and operations or ETP elects not to purchase the project form us, we may retain the project for further development and subsequent sale or, alternatively, sell the project to another company. The opportunities that we pursue that are not complementary to ETP’s strategy or operations may include opportunities to acquire a business or construct an asset in geographic areas where ETP does not desire to operate, or opportunities to acquire a business or construct an asset that would not be complementary with the natural gas gathering, transportation and storage or retail propane businesses of ETP.

 

Financial Presentation. We reflect our ownership interest in ETP on a consolidated basis, which means that our financial results are combined with ETP’s financial results and the results of our other subsidiaries. The limited partner interests in ETP not owned by affiliates of the general partner are reflected as an expense in our results of operations. We initially will have no separate operating activities apart from those conducted by ETP, and our cash flows currently consist of distributions from ETP on the partnership interests, including the incentive distribution rights, that we own. Our consolidated results of operations principally reflect the results of operations of ETP, and also include our gains on the issuance of ETP common units, provision for income taxes and interest of non-controlling partners in ETP’s net income. Accordingly, the discussion of our financial position and results of operations in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects the operating activities and results of operations of ETP. The historical results of our operations do not reflect the incremental expenses we expect to incur as a result of being a publicly traded partnership.

 

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Energy Transfer Partners

 

Energy Transfer Partners is a Delaware limited partnership. ETP’s common units are listed on the New York Stock Exchange under the symbol “ETP.” ETP’s business activities are primarily conducted through its subsidiaries, La Grange Acquisition, L.P., which we refer to as “ETC OLP,” and Heritage Operating, L.P., which we refer to as “HOLP.” Energy Transfer Partners, L.P., ETC OLP and HOLP are sometimes referred to collectively in this prospectus as “ETP.”

 

Energy Transfer Transactions

 

On January 20, 2004, we and Heritage completed a series of transactions which, among other things, included:

 

    we contributed ETC OLP to Heritage in exchange for cash, the assumption of certain liabilities and three classes of securities;

 

    we acquired the general partner of Heritage, Energy Transfer Partners GP, L.P., from its owners; and

 

    Heritage purchased the outstanding stock of Heritage Holdings, Inc. (“Heritage Holdings”), the former general partner of Heritage, from the then-current owners of Energy Transfer Partners GP, L.P.

 

The Energy Transfer Transactions were accounted for as a reverse acquisition in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141). Although Heritage was the surviving parent entity for legal purposes, ETC OLP was the acquiror for accounting purposes. As a result, our historical financial statements are the historical financial statements of the combined company. The operations of Heritage prior to the Energy Transfer Transactions are referred to as Heritage.

 

Other Recent ETP Transactions

 

ET Fuel System Acquisition. On June 2, 2004, ETP announced the closing of its acquisition of the midstream natural gas pipeline and