XNYS:ETE Energy Transfer Equity LP Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-32740
ENERGY TRANSFER EQUITY, L.P.
(Exact name of registrant as specified in its charter)
 
Delaware
 
30-0108820
(state or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3738 Oak Lawn Avenue, Dallas, Texas 75219
(Address of principal executive offices) (zip code)
(214) 981-0700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
£  (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
At May 2, 2012, the registrant had units outstanding as follows:
Energy Transfer Equity, L.P. 279,955,608 Common Units



FORM 10-Q
TABLE OF CONTENTS
Energy Transfer Equity, L.P. and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


Forward-Looking Statements
Certain matters discussed in this report, excluding historical information, as well as some statements by Energy Transfer Equity, L.P. (“Energy Transfer Equity,” the “Partnership” or “ETE”) in periodic press releases and some oral statements of Energy Transfer Equity officials during presentations about the Partnership, include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. Statements using words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “estimate,” “intend,” “continue,” “believe,” “may,” “will” or similar expressions help identify forward-looking statements. Although the Partnership and its General Partner believe such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be given that such assumptions, expectations or projections 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, the Partnership’s actual results may vary materially from those anticipated, estimated or expressed, forecasted, projected or expected in forward-looking statements since many of the factors that determine these results are subject to uncertainties and risks that are difficult to predict and beyond management’s control. For additional discussion of risks, uncertainties and assumptions, see “Part II — Other Information – Item 1A. Risk Factors” included in this Quarterly Report on Form 10-Q, as well as “Part I — Item 1A. Risk Factors” in the Partnership’s Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on February 22, 2012.
Definitions
The following is a list of certain acronyms and terms generally used in the energy industry and throughout this document:
/d
  
per day
 
 
AmeriGas
 
AmeriGas Partners, L.P.
 
 
 
AOCI
 
accumulated other comprehensive income
 
 
 
AROs
 
asset retirement obligations
 
 
 
Bbls
  
barrels
 
 
Bcf
 
billion cubic feet
 
 
 
Btu
  
British thermal unit, an energy measurement used by gas companies to convert the volume of gas used to its heat equivalent, and thus calculate the actual energy content
 
 
 
CAA
 
Federal Clean Air Act
 
 
Capacity
  
capacity of a pipeline, processing plant or storage facility refers to the maximum capacity under normal operating conditions and, with respect to pipeline transportation capacity, is subject to multiple factors (including natural gas injections and withdrawals at various delivery points along the pipeline and the utilization of compression) which may reduce the throughput capacity from specified capacity levels
 
 
 
Citrus
 
Citrus Corp., which owns 100% of FGT
 
 
 
Citrus Merger
 
ETP's acquisition of Citrus Corp. on March 26, 2012
 
 
 
CrossCountry
 
CrossCountry Energy LLC
 
 
 
CFTC
 
Commodities Futures Trading Commission
 
 
Credit Suisse
 
Credit Suisse Securities (USA) LLC
 
 
 
CRSA
 
Contingent Residual Support Agreement
 
 
 
DER
 
Distribution equivalent rights
 
 
 
DRIP
 
Distribution Reinvestment Plan
 
 
 
DOT
 
U.S. Department of Transportation
 
 
 
ETP
 
Energy Transfer Partners, L.P.
 
 
 
ETP Credit Facility
 
ETP's revolving credit facility
 
 
 
ETP GP
 
Energy Transfer Partners GP, L.P., the general partner of ETP
 
 
 
ETP LLC
 
Energy Transfer Partners, L.L.C., the general partner of ETP GP
 
 
 

ii


EPA
 
U.S. Environmental Protection Agency
 
 
 
Exchange Act
 
Securities Exchange Act of 1934
 
 
 
FDOT/FTE
 
Florida Department of Transportation, Florida's Turnpike Enterprise
 
 
 
FEP
 
Fayetteville Express Pipeline LLC
 
 
 
FERC
 
Federal Energy Regulatory Commission
 
 
 
FGT
 
Florida Gas Transmission Company, LLC, which owns a natural gas pipeline system that originates in Texas and delivers natural gas to the Florida peninsula
 
 
 
GAAP
 
accounting principles generally accepted in the United States of America
 
 
 
HPC
 
RIGS Haynesville Partnership Co.
 
 
 
HOLP
 
Heritage Operating, L.P.
 
 
 
ICA
 
Interstate Commerce Act
 
 
 
IDRs
 
incentive distribution rights
 
 
 
LDH
 
LDH Energy Asset Holdings LLC
 
 
 
LIBOR
 
London Interbank Offered Rate
 
 
 
LNG
 
Liquefied natural gas
 
 
 
LNG Holdings
 
Trunkline LNG Holdings, LLC
 
 
 
Lone Star
 
Lone Star NGL LLC
 
 
 
MDPU
 
Massachusetts Department of Public Utilities
 
 
 
MEP
 
Midcontinent Express Pipeline LLC
 
 
 
MGP
 
manufactured gas plant
 
 
 
MMBtu
  
million British thermal units
 
 
 
NGA
 
Natural Gas Act
 
 
 
NGL
  
natural gas liquid, such as propane, butane and natural gasoline
 
 
NMED
 
New Mexico Environmental Department
 
 
 
NOL
 
net operating loss
 
 
 
NYMEX
  
New York Mercantile Exchange
 
 
OTC
 
over-the-counter
 
 
Other Post-retirement Plans
 
postretirement health care and life insurance plans
 
 
 
OSHA
 
Federal Occupational Safety and Health Act
 
 
Panhandle
 
Panhandle Eastern Pipe Line Company, LP and its subsidiaries
 
 
 
PCB
 
polychlorinated biphenyl
 
 
Pension Plans
 
funded non-contributory defined benefit pension plans
 
 
 
PEPL
 
Panhandle Eastern Pipe Line Company, LP
 
 
 
PHMSA
 
Pipeline Hazardous Materials Safety Administration
 
 
RIGS
 
Regency Intrastate Gas System
 
 
 
Preferred Units
 
ETE's Series A Convertible Preferred Units
 
 
 
Propane Business
 
Heritage Operating, L.P. and Titan Energy Partners, L.P.

iii


 
 
 
Propane Contribution
 
ETP's contribution of its Propane Business to AmeriGas
 
 
 
Ranch JV
 
Ranch Westex JV LLC
 
 
 
Regency
 
Regency Energy Partners LP
 
 
 
Regency GP
 
Regency Energy Partners GP LP, the general partner of Regency
 
 
 
Regency LLC
 
Regency Energy Partners GP LLC, the general partner of Regency GP
 
 
 
Regency Preferred Units
 
Regency's Series A Convertible Preferred Units, the Preferred Units of a Subsidiary
 
 
Reservoir
  
a porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers
 
 
Sea Robin Pipeline
 
Sea Robin Pipeline Company LLC
 
 
 
SEC
 
Securities and Exchange Commission
 
 
 
Southern Union
 
Southern Union Company
 
 
 
Southern Union Credit Facility
 
Southern Union's revolving credit facility
 
 
 
Southern Union Merger
 
ETE's acquisition of Southern Union Company on March 26, 2012
 
 
 
SUGS
 
Southern Union Gas Services
 
 
 
Sunoco
 
Sunoco Inc.
 
 
 
Sunoco Logistics
 
Sunoco Logistics Partners L.P.
 
 
 
TCEQ
 
Texas Commission on Environmental Quality
 
 
 
Tcf
 
trillion cubic feet
 
 
 
Transwestern
 
Transwestern Pipeline Company, LLC
 
 
 
Trunkline LNG
 
Trunkline LNG Company, LLC
 
 
 
WTI
  
West Texas Intermediate Crude


iv


PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
 
 
March 31, 2012
 
December 31, 2011
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
293,057

 
$
126,342

Marketable securities
11

 
1,229

Accounts receivable, net of allowance for doubtful accounts of $3,213 and $8,841 as of March 31, 2012 and December 31, 2011, respectively
851,628

 
680,491

Accounts receivable from related companies
26,424

 
100,406

Inventories
379,021

 
327,963

Exchanges receivable
61,319

 
21,307

Price risk management assets
38,140

 
15,802

Other current assets
224,170

 
181,904

Total current assets
1,873,770

 
1,455,444

PROPERTY, PLANT AND EQUIPMENT
23,068,083

 
16,529,339

ACCUMULATED DEPRECIATION
(1,664,262
)
 
(1,970,777
)
 
21,403,821

 
14,558,562

ADVANCES TO AND INVESTMENTS IN AFFILIATES
4,667,594

 
1,496,600

LONG-TERM PRICE RISK MANAGEMENT ASSETS
25,345

 
26,011

GOODWILL
3,400,542

 
2,038,975

INTANGIBLE ASSETS, net
960,725

 
1,072,291

OTHER NON-CURRENT ASSETS, net
490,304

 
248,910

Total assets
$
32,822,101

 
$
20,896,793




















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

1



ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)

 
March 31, 2012
 
December 31, 2011
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
518,047

 
$
512,023

Accounts payable to related companies
2,658

 
33,208

Exchanges payable
124,993

 
17,957

Price risk management liabilities
72,068

 
90,053

Accrued and other current liabilities
948,659

 
763,912

Current maturities of long-term debt
109,127

 
424,160

Total current liabilities
1,775,552

 
1,841,313

 
 
 
 
LONG-TERM DEBT, less current maturities
17,391,195

 
10,946,864

PREFERRED UNITS (Note 11)
326,950

 
322,910

ACCUMULATED DEFERRED INCOME TAXES
2,010,667

 
217,244

LONG-TERM PRICE RISK MANAGEMENT LIABILITIES
180,924

 
81,415

OTHER NON-CURRENT LIABILITIES
300,178

 
26,958

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 16)

 

 
 
 
 
PREFERRED UNITS OF SUBSIDIARY (Note 11)
72,196

 
71,144

 
 
 
 
EQUITY:
 
 
 
General Partner
357

 
321

Limited Partners:
 
 
 
Common Unitholders
2,418,541

 
52,485

Accumulated other comprehensive income
6,570

 
678

Total partners’ capital
2,425,468

 
53,484

Noncontrolling interest
8,338,971

 
7,335,461

Total equity
10,764,439

 
7,388,945

Total liabilities and equity
$
32,822,101

 
$
20,896,793













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

2


ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per unit data)
(unaudited)
 
 
Three Months Ended March 31,
 
2012
 
2011
REVENUES:
 
 
 
Natural gas sales
$
504,610

 
$
709,324

NGL sales
532,299

 
275,152

Gathering, transportation and other fees
500,962

 
412,256

Retail propane sales
75,445

 
528,466

Other
75,815

 
63,922

Total revenues
1,689,131

 
1,989,120

COSTS AND EXPENSES:
 
 
 
Cost of products sold
1,022,200

 
1,201,426

Operating expenses
174,905

 
220,696

Depreciation and amortization
161,201

 
139,256

Selling, general and administrative
148,262

 
63,499

Total costs and expenses
1,506,568

 
1,624,877

OPERATING INCOME
182,563

 
364,243

OTHER INCOME (EXPENSE):
 
 
 
Interest expense, net of interest capitalized
(213,330
)
 
(167,929
)
Bridge loan related fees
(62,241
)
 

Equity in earnings of affiliates
75,232

 
25,441

Gain on deconsolidation of Propane Business
1,055,944

 

Losses on disposal of assets
(1,060
)
 
(1,754
)
Loss on extinguishment of debt
(115,023
)
 

Gains on non-hedged interest rate derivatives
27,490

 
1,520

Other, net
13,306

 
(12,526
)
INCOME BEFORE INCOME TAX EXPENSE
962,881

 
208,995

Income tax expense
1,579

 
9,903

NET INCOME
961,302

 
199,092

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
794,880

 
110,452

NET INCOME ATTRIBUTABLE TO PARTNERS
166,422

 
88,640

GENERAL PARTNER’S INTEREST IN NET INCOME
506

 
274

LIMITED PARTNERS’ INTEREST IN NET INCOME
$
165,916

 
$
88,366

BASIC NET INCOME PER LIMITED PARTNER UNIT
$
0.73

 
$
0.40

BASIC AVERAGE NUMBER OF UNITS OUTSTANDING
226,730,477

 
222,954,674

DILUTED NET INCOME PER LIMITED PARTNER UNIT
$
0.73

 
$
0.40

DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING
226,730,477

 
222,954,674






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

3


ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
2012
 
2011
Net income
$
961,302

 
$
199,092

Other comprehensive income (loss), net of tax:
 
 
 
Reclassification to earnings of gains and losses on derivative instruments accounted for as cash flow hedges
65

 
(13,539
)
Change in value of derivative instruments accounted for as cash flow hedges
21,649

 
(10,838
)
Change in value of available-for-sale securities
(114
)
 
608

 
21,600

 
(23,769
)
Comprehensive income
982,902

 
175,323

Less: Comprehensive income attributable to noncontrolling interest
810,588

 
92,263

Comprehensive income attributable to partners
$
172,314

 
$
83,060





































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

4


ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Dollars in thousands)
(unaudited)
 
 
General
Partner    
 
Common
Unitholders    
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interest
 
Total    
Balance, December 31, 2011
$
321

 
$
52,485

 
$
678

 
$
7,335,461

 
$
7,388,945

Distributions to partners
(433
)
 
(139,358
)
 

 

 
(139,791
)
Distributions to noncontrolling interest

 

 

 
(219,990
)
 
(219,990
)
Units issued in Southern Union Merger (See Note 3)

 
2,354,490

 

 

 
2,354,490

Subsidiary units issued for cash
(36
)
 
(14,634
)
 

 
399,313

 
384,643

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

 
164

 

 
11,967

 
12,131

Capital contributions from noncontrolling interest

 

 

 
5,133

 
5,133

Other, net
(1
)
 
(522
)
 

 
(3,501
)
 
(4,024
)
Other comprehensive income, net of tax

 

 
5,892

 
15,708

 
21,600

Net income
506

 
165,916

 

 
794,880

 
961,302

Balance, March 31, 2012
$
357

 
$
2,418,541

 
$
6,570

 
$
8,338,971

 
$
10,764,439



























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

5


ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2012
 
2011
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
 
 
 
Net income
$
961,302

 
$
199,092

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
161,201

 
139,256

Deferred income taxes
(2,138
)
 
1,101

Gain on curtailment of other postretirement benefit plans
(15,332
)
 

Amortization of finance costs charged to interest
5,449

 
5,080

Bridge loan related fees
62,241

 

Non-cash compensation expense
12,155

 
11,385

Gain on deconsolidation of Propane Business
(1,055,944
)
 

Losses on disposal of assets
1,060

 
1,754

Loss on extinguishment of debt
115,023

 

Distributions in excess of (less than) equity in earnings of affiliates, net
(18,076
)
 
21,582

Other non-cash
2,545

 
16,569

Changes in operating assets and liabilities, net of effects of acquisitions and deconsolidation
(150,130
)
 
(37,670
)
Net cash provided by operating activities
79,356

 
358,149

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Cash paid for Southern Union Merger, net of cash received
(2,971,764
)
 

Cash paid for acquisitions, net of cash received
(10,066
)
 
(3,060
)
Capital expenditures (excluding allowance for equity funds used during construction)
(594,537
)
 
(279,587
)
Contributions in aid of construction costs
5,732

 
2,754

Distributions from (advances to) affiliates, net
3,967

 
(11,053
)
Proceeds from the sale of assets
25,715

 
687

Proceeds from the contribution of Propane Business
1,383,802

 

Net cash used in investing activities
(2,157,151
)
 
(290,259
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from borrowings
4,786,963

 
997,094

Repayments of long-term debt
(2,473,560
)
 
(763,615
)
Subsidiary equity offering, net of issue costs
384,643

 
57,373

Distributions to partners
(139,791
)
 
(120,763
)
Debt issuance costs
(96,920
)
 

Distributions to noncontrolling interest
(219,990
)
 
(179,631
)
Capital contributions from noncontrolling interest
5,133

 

Other, net
(1,968
)
 
(1,580
)
Net cash provided by (used in) financing activities
2,244,510

 
(11,122
)
INCREASE IN CASH AND CASH EQUIVALENTS
166,715

 
56,768

CASH AND CASH EQUIVALENTS, beginning of period
126,342

 
86,264

CASH AND CASH EQUIVALENTS, end of period
$
293,057

 
$
143,032

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

6


ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar amounts, except per unit data, are in thousands)
(unaudited)
 
1.
OPERATIONS AND ORGANIZATION:
Business Operations
Unless the context requires otherwise, references to “we,” “us,” “our,” the “Partnership” and “ETE” mean Energy Transfer Equity, L.P. and its consolidated subsidiaries, which include ETP, ETP GP, ETP LLC, Regency, Regency GP, Regency LLC, and Southern Union. References to the “Parent Company” mean Energy Transfer Equity, L.P. on a stand-alone basis.
At March 31, 2012, our equity interests in ETP and Regency consisted of:
 
General Partner
Interest
(as a % of total
partnership  interest)
 
IDRs
 
Common
Units
 
Total Ownership
(as a % and net of any treasury units)
ETP
1.5
%
 
100
%
 
52,476,059

 
24
%
Regency
1.6
%
 
100
%
 
26,266,791

 
17
%
On March 26, 2012, we acquired all of the outstanding shares of Southern Union for approximately $3.01 billion in cash and approximately 57.0 million ETE Common Units. See Note 3 for more information regarding the Southern Union Merger.
The unaudited consolidated financial statements of ETE presented herein for the three month periods ended March 31, 2012 and 2011 include the results of operations of:
the Parent Company;
our controlled subsidiaries, ETP and Regency (see description of their respective operations below under “Business Operations”);
our wholly-owned subsidiary, Southern Union (see description of its operations below under “Business Operations”); and
ETP’s, Regency’s and Southern Union’s wholly-owned subsidiaries and our wholly-owned subsidiaries that own the general partner and IDR interests in ETP and Regency.
Our unaudited consolidated financial statements include the results of operations of Southern Union from March 26, 2012, the date we acquired Southern Union, through March 31, 2012.
Business Operations
The Parent Company’s principal sources of cash flow have historically derived from its direct and indirect investments in the limited partner and general partner interests in ETP and Regency. Effective with the acquisition of Southern Union, the Parent Company also generates cash flows through its wholly-owned subsidiary, Southern Union. The Parent Company’s primary cash requirements are for general and administrative expenses, debt service requirements and distributions to its partners and holders of the Preferred Units. Parent Company-only assets are not available to satisfy the debts and other obligations of ETE’s subsidiaries. In order to understand the financial condition of the Parent Company on a stand-alone basis, see Note 21 for stand-alone financial information apart from that of the consolidated partnership information included herein.
The following is a brief description of our operating entities:
ETP is a publicly traded partnership owning and operating a diversified portfolio of energy assets. ETP has pipeline operations in Arizona, Arkansas, Colorado, Louisiana, New Mexico, Utah and West Virginia and owns the largest intrastate pipeline system in Texas. ETP currently has natural gas operations that include gathering and transportation pipelines, treating and processing assets, and storage facilities located in Texas. ETP also holds a 70% interest in Lone Star , a joint venture that owns and operates NGL storage, fractionation and transportation assets in Texas, Louisiana and Mississippi. Concurrent with the Parent Company's acquisition of Southern Union, ETP acquired a 50% interest in Citrus, which owns FGT (see Note 3).

7


Regency is a publicly traded partnership engaged in the gathering and processing, contract compression, treating and transportation of natural gas and the transportation, fractionation and storage of NGLs. Regency focuses on providing midstream services in some of the most prolific natural gas producing regions in the United States, including the Haynesville, Eagle Ford, Barnett, Fayetteville, Bone Spring, Avalon and Marcellus shales, as well as the Permian Delaware basin and the mid-continent region. Its assets are located in California, Louisiana, Texas, Arkansas, Pennsylvania, Mississippi, Alabama and the mid-continent region of the United States, which includes Kansas, Colorado and Oklahoma. Regency also holds a 30% interest in Lone Star.
Southern Union is engaged primarily in the transportation, storage, gathering, processing and distribution of natural gas. Southern Union owns and operates interstate pipeline that transports natural gas from the Gulf of Mexico, South Texas and the Panhandle regions of Texas and Oklahoma to major U.S. markets in the Midwest and Great Lakes regions. It owns and operates a LNG import terminal located on Louisiana's Gulf Coast. Through SUGS, it owns natural gas and NGL pipelines, cryogenic plants, treating plants and is engaged in connecting producing wells of exploration and production companies to its gathering system, treating natural gas to remove impurities to meet pipeline quality specifications, processing natural gas for the removal of NGLs and redelivering natural gas and NGLs to a variety of markets in West Texas and New Mexico. Southern Union also has regulated utility operations in Missouri and Massachusetts.
See Note 20 for discussion regarding our reportable segments.
Preparation of Interim Financial Statements
The accompanying consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements and notes thereto of the Partnership, as of March 31, 2012 and for the three months period ended March 31, 2012 and 2011, have been prepared in accordance with GAAP for interim consolidated financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete consolidated financial statements. However, management believes that the disclosures made are adequate to make the information not misleading. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year due to the seasonal nature of the Partnership’s operations, maintenance activities of the Partnership’s subsidiaries and the impact of forward natural gas prices and differentials on certain derivative financial instruments that are accounted for using mark-to-market accounting. Management has evaluated subsequent events through the date the financial statements were issued.
In the opinion of management, all adjustments (all of which are normal and recurring) have been made that are necessary to fairly state the consolidated financial position of the Partnership as of March 31, 2012, and the Partnership’s results of operations and cash flows for the three months ended March 31, 2012 and 2011. The unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto presented in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on February 22, 2012.
Certain prior period amounts have been reclassified to conform to the 2012 presentation. These reclassifications had no impact on net income or total equity.

2.
ESTIMATES AND SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the accrual for and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The natural gas industry conducts its business by processing actual transactions at the end of the month following the month of delivery. Consequently, the most current month’s financial results for natural gas and NGL related operations are estimated using volume estimates and market prices. Any differences between estimated results and actual results are recognized in the following month’s financial statements. Management believes that the estimated operating results represent the actual results in all material respects.
Some of the other significant estimates made by management include, but are not limited to, the timing of certain forecasted transactions that are hedged, the fair value of derivative instruments, useful lives for depreciation and amortization, purchase accounting allocations and subsequent realizability of intangible assets, fair value measurements used in the goodwill impairment test, market value of inventory, assets and liabilities resulting from the regulated ratemaking process, contingency reserves and environmental reserves. Actual results could differ from those estimates.

8


Significant Accounting Policies
As a result of the Southern Union Merger on March 26, 2012, the following significant accounting policies have been added to our significant accounting policies described in our Form 10-K for the year ended December 31, 2011.
Pensions and Other Postretirement Benefit Plans
Employers are required to recognize in their balance sheets the overfunded or underfunded status of defined benefit pension and other postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other postretirement plans). Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. Employers must recognize the change in the funded status of the plan in the year in which the change occurs through Accumulated other comprehensive income in equity. See Note 14 for further information regarding pensions and other postretirement benefit plans.
Revenue Recognition for Southern Union's Natural Gas Distribution Operations
In Southern Union's natural gas distribution operations, natural gas utility customers are billed on a monthly-cycle basis. The related cost of natural gas and revenue taxes are matched with cycle-billed revenues through utilization of purchased natural gas adjustment provisions in tariffs approved by the regulatory agencies having jurisdiction. Revenues from natural gas delivered but not yet billed are accrued, along with the related natural gas purchase costs and revenue-related taxes.

3.
ACQUISITIONS:
Southern Union Merger
On March 26, 2012, Sigma Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of ETE, completed its acquisition of Southern Union. Southern Union is the surviving entity in the merger and will continue to operate as our wholly-owned subsidiary of ETE. The assets acquired as a result of this merger significantly expand our existing geographic footprint of natural gas pipeline and natural gas transportation capacity and into natural gas utilities distribution, and are complementary to the assets owned and operated by our other entities.
Under the terms of the merger agreement, Southern Union stockholders were able to elect to exchange each outstanding share of Southern Union common stock for $44.25 in cash or 1.00 ETE Common Unit, with no more than 60% of the aggregate merger consideration payable in cash and no more than 50% of the merger consideration payable in ETE Common Units. Based on the final results of the merger consideration, elections were as follows:
approximately 54% of outstanding Southern Union shares, or 67,985,929 shares, received cash for total cash consideration of $3.01 billion; and
approximately 46% of outstanding Southern Union shares, or 56,981,860 shares, received ETE Common Units valued at $2.35 billion at the time of the merger.
Effective with the closing of the transaction, Southern Union's common stock is no longer publicly traded.
Citrus Merger
In connection with the Southern Union Merger on March 26, 2012, ETP completed its acquisition of CrossCountry, a subsidiary of Southern Union which owns an indirect 50% interest in Citrus, the owner of FGT. The total merger consideration was approximately $2.0 billion, consisting of approximately $1.9 billion in cash and approximately 2.25 million ETP Common Units. See Note 4 for more information regarding ETP's equity method investment in Citrus.
In connection with the Citrus Merger, we relinquished our rights to approximately $220 million of IDRs from ETP that we would otherwise be entitled to receive over 16 consecutive quarters following the closing of the transaction.
Pursuant to the merger agreement, we also granted ETP a right of first offer with respect to any disposition by us or SUGS, a subsidiary of Southern Union that owns and operates a natural gas gathering and processing system serving the Permian Basin in West Texas and New Mexico.

9


Summary of Assets Acquired and Liabilities Assumed
We accounted for the Southern Union Merger using the acquisition method of accounting. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. Our consolidated balance sheet presented as of March 31, 2012 reflects the preliminary purchase price allocations based on available information. Management is reviewing the valuation and confirming results to determine the final purchase price allocation. The purchase price allocation is expected to be finalized in the third quarter of 2012.
The following table summarizes the preliminary assets acquired and liabilities assumed recognized as of the merger date:
 
Total current assets
$
560,041

Property, plant and equipment
7,121,935

Goodwill
1,955,691

Intangible assets
47,000

Regulatory assets
136,280

Investments in unconsolidated affiliates
2,022,784

Other assets
26,822

 
11,870,553

 
 
Total current liabilities
886,908

Long-term debt obligations
3,565,260

Deferred income taxes
1,771,407

Other non-current liabilities
284,110

 
6,507,685

Total consideration
5,362,868

Cash received
36,613

Total consideration, net of cash received
$
5,326,255

Other non-current liabilities assumed includes approximately $46.0 million of AROs, which are primarily related to owned natural gas storage wells and offshore lines and platforms. At the end of the useful life of these underlying assets, Southern Union is legally or contractually required to abandon in place or remove the asset. An ARO is required to be recorded when a legal obligation to retire an asset exists and such obligation can be reasonably estimated. Although a number of other onshore assets in Southern Union's system are subject to agreements that give rise to an ARO upon the discontinued use of the assets, AROs were not recorded because these assets have an indeterminate removal or abandonment date given the expected continued use of the assets with proper maintenance or replacement.
Other current liabilities assumed includes approximately $65.3 million for accrued compensation of certain terminated Southern Union employees that had employment agreements with South Union and severance costs associated with administrative headcount reductions.
Pro Forma Results of Operations
The following unaudited pro forma consolidated results of operations for the three months ended March 31, 2012 and 2011 are presented as if the Southern Union Merger had been completed on January 1, 2011.
 
Three Months Ended March 31,
 
2012
 
2011
Revenues
$
2,322,780

 
$
2,735,942

Net income
969,641

 
218,699

Net income attributable to partners
173,070

 
99,571

Basic net income per Limited Partner unit
$
0.61

 
$
0.35

Diluted net income per Limited Partner unit
$
0.61

 
$
0.35


10


The pro forma consolidated results of operations include adjustments to:
include the results of Southern Union for all periods presented;
include the incremental expenses associated with the fair value adjustments recorded as a result of applying the acquisition method of accounting;
include incremental interest expense related to financing the transactions;
adjust for one-time expenses; and
adjust for relative changes in ownership resulting from the transactions.
The pro forma information is not necessarily indicative of the results of operations that would have occurred had the Southern Union Merger been made at the beginning of the periods presented or the future results of the combined operations.
Southern Union's revenue and net loss since the acquisition date to March 31, 2012 included in our consolidated statement of operations were $39.7 million and $38.5 million, respectively.
Expenses Related to the Southern Union Merger
As a result of the acquisition, we recognized $29.9 million of general and administrative costs during the three months ended March 31, 2012.
Pending Sunoco Merger
On April 30, 2012, ETP announced that it had entered into a definitive merger agreement whereby ETP will acquire Sunoco in a common unit and cash transaction valued at $5.3 billion based on ETP's closing price on April 27, 2012. Under the terms of the merger agreement, Sunoco shareholders would receive, for each Sunoco common share, either $50.00 in cash, 1.0490 ETP Common Units or a combination of $25.00 in cash and 0.5245 ETP Common Units. The aggregate cash paid and ETP Common Units issued will be capped so that the cash and ETP Common Units will each represent 50% of the aggregate consideration. Upon closing, Sunoco shareholders are expected to own approximately 20% of ETP's outstanding limited partner interests. This transaction is expected to close in the third or fourth quarter of 2012, subject to approval by Sunoco's shareholders and customary regulatory approvals.
In connection with the transaction, we have agreed to relinquish our right to approximately $210 million of IDRs from ETP that we would otherwise receive over 12 consecutive quarters following the closing of the transaction.
Sunoco owns the general partner interest of Sunoco Logistics, consisting of a 2% ownership interest and IDRs, and 32.4% of the outstanding common units of Sunoco Logistics. Sunoco also generates cash flow from a portfolio of 4,900 retail outlets for the sale of gasoline and middle distillates in the east coast, midwest and southeast areas of the United States.
Sunoco Logistics is a publicly traded limited partnership that owns and operates a logistics business consisting of a geographically diverse portfolio of complementary pipeline, terminalling and crude oil acquisition and marketing assets. The refined products pipelines business consists of approximately 2,500 miles of refined products pipelines located in the northeast, midwest and southwest United States, and equity interests in four refined products pipelines. The crude oil pipeline business consists of approximately 5,400 miles of crude oil pipelines, located principally in Oklahoma and Texas. The terminal facilities business consists of approximately 42 million shell barrels of refined products and crude oil terminal capacity (including approximately 22 million shell barrels of capacity at the Nederland Terminal on the Gulf Coast of Texas and approximately 5 million shell barrels of capacity at the Eagle Point terminal on the banks of the Delaware River in New Jersey). The crude oil acquisition and marketing business involves the acquisition and marketing of crude oil and is principally conducted in Oklahoma and Texas and consists of approximately 190 crude oil transport trucks and approximately 120 crude oil truck unloading facilities.

11


4.
INVESTMENTS IN AFFILIATES:
Citrus Corp.
ETP acquired a 50% interest in Citrus, which owns 100% of FGT on March 26, 2012. El Paso Corporation owns the remaining 50% interest in Citrus. In exchange for the interest in Citrus, Southern Union received $1.9 billion in cash and $105 million of ETP Common Units. ETP initially recorded its investment in Citrus at $2.0 billion, which exceeded its proportionate share of Citrus' equity by $1.03 billion, all of which is treated as equity method goodwill due to the application of regulatory accounting.
AmeriGas Partners, L.P.
On January 12, 2012, ETP contributed its Propane Business to AmeriGas in exchange for approximately $1.46 billion in cash and approximately 29.6 million AmeriGas Common Units valued at $1.12 billion at the time of the contribution. In addition, AmeriGas assumed approximately $71 million of existing debt of the Propane Business. ETP recognized a gain on deconsolidation of $1.06 billion and recorded $39.4 million of equity in earnings related to AmeriGas for the three months ended March 31, 2012.
ETP's investment in AmeriGas initially reflected $639.6 million in excess of the proportionate share of AmeriGas' limited partners' capital. Of this excess fair value, $177.3 million is being amortized over a weighted average period of 12 years and $462.3 million is being treated as equity method goodwill and non-amortizable intangible assets.
We have not reflected the Propane operations as discontinued operations as ETP will have a continuing involvement in this business as a result of the investment in AmeriGas.
Midcontinent Express Pipeline LLC
Regency owns a 50% interest in MEP, which owns approximately 500 miles of natural gas pipelines that extend from Southeast Oklahoma, across Northeast Texas, Northern Louisiana and Central Mississippi to an interconnect with the Transcontinental natural gas pipeline system in Butler, Alabama.
RIGS Haynesville Partnership Co.
Regency owns a 49.99% interest in HPC, which, through its ownership of the RIGS, delivers natural gas from Northwest Louisiana to downstream pipelines and markets through a 450-mile intrastate pipeline system.
Fayetteville Express Pipeline LLC
ETP owns a 50% interest in the FEP, which owns an approximately 185-mile natural gas pipeline that originates in Conway County, Arkansas, continues eastward through White County, Arkansas and terminates at an interconnect with Trunkline Gas Company in Panola County, Mississippi.
Summarized Financial Information
The following tables present aggregated selected income statement data for our unconsolidated affiliates, including AmeriGas, Citrus, FEP, HPC and MEP (on a 100% basis for all periods presented).
 
Three Months Ended March 31,
 
2012
 
2011
Revenue
$
1,365,877

 
$
1,155,218

Operating income
314,081

 
277,028

Net income
215,258

 
219,141

In addition to the equity method investments described above, ETP and Southern Union each have other equity method investments.


12


5.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all cash on hand, demand deposits, and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
Non-cash investing and financing activities are as follows:
 
Three Months Ended March 31,
 
2012
 
2011
NON-CASH INVESTING ACTIVITIES:
 
 
 
Accrued capital expenditures
$
244,883

 
$
107,451

Gain (loss) from subsidiary common unit transactions
$
(14,670
)
 
$
7,172

AmeriGas limited partner interest received in Propane Contribution (see Note 4)
$
1,123,003

 
$

NON-CASH FINANCING ACTIVITIES:
 
 
 
Issuance of common units in connection with Southern Union Merger (see Note 3)
$
2,354,490

 
$

Subsidiary issuance of common units in connection with acquisition
$
105,000

 
$


6.
INVENTORIES:
Inventories consisted of the following:
 
March 31,
2012
 
December 31,
2011
Natural gas and NGLs, excluding propane
$
253,906

 
$
146,132

Propane
2,895

 
86,958

Appliances, parts and fittings and other
122,220

 
94,873

Total inventories
$
379,021

 
$
327,963


ETP utilizes commodity derivatives to manage price volatility associated with its natural gas inventory and designates certain of these derivatives as fair value hedges for accounting purposes. Changes in fair value of the designated hedged inventory have been recorded in inventory on our consolidated balance sheets and in cost of products sold in our consolidated statements of operations.

 
7.
GOODWILL AND INTANGIBLE ASSETS:
A net increase in goodwill of $1.36 billion was recorded during the three months ended March 31, 2012, which includes goodwill of $1.96 billion recorded as a result of the Southern Union Merger, partially offset by a decrease of $605.6 million as a result of ETP's contribution of its Propane Business to AmeriGas.
The goodwill recorded as a result of the Southern Union Merger is primarily due to expected commercial and operational synergies and is subject to change based on final purchase price allocations. None of the goodwill recorded as a result of this transaction is deductible for tax purposes. See Note 3 for further discussion of Southern Union Merger.


13


8.
FAIR VALUE MEASUREMENTS:
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value. Price risk management assets and liabilities are recorded at fair value.
We have marketable securities, commodity derivatives, interest rate derivatives, the Preferred Units and embedded derivatives in the Regency Preferred Units that are accounted for as assets and liabilities at fair value in our consolidated balance sheets. We determine the fair value of our assets and liabilities subject to fair value measurement by using the highest possible “level” of inputs. Level 1 inputs are observable quotes in an active market for identical assets and liabilities. We consider the valuation of marketable securities and commodity derivatives transacted through a clearing broker with a published price from the appropriate exchange as a Level 1 valuation. Level 2 inputs are inputs observable for similar assets and liabilities. We consider OTC commodity derivatives entered into directly with third parties as a Level 2 valuation since the values of these derivatives are quoted on an exchange for similar transactions. Additionally, we consider our options transacted through our clearing broker as having Level 2 inputs due to the level of activity of these contracts on the exchange in which they trade. We consider the valuation of our interest rate derivatives as Level 2 as the primary input, the LIBOR curve, is based on quotes from an active exchange of Eurodollar futures for the same period as the future interest swap settlements. Level 3 inputs are unobservable. Derivatives related to the Regency Preferred Units are valued using a binomial lattice model. The market inputs utilized in the model include credit spread, probabilities of the occurrence of certain events, common unit price, dividend yield, and expected value, and are considered Level 3. The fair value of the Preferred Units was based predominantly on an income approach model and is also considered Level 3.
Based on the estimated borrowing rates currently available to us and our subsidiaries for long-term loans with similar terms and average maturities, the aggregate fair value and carrying amount of our consolidated debt obligations as of March 31, 2012 was $18.83 billion and $17.50 billion, respectively. As of December 31, 2011, the aggregate fair value and carrying amount of our consolidated debt obligations was $12.21 billion and $11.37 billion, respectively. We consider the fair value of our consolidated debt obligations as Level 2 since the value is based on similar liabilities.

14


The following tables summarize the fair value of our financial assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 based on inputs used to derive their fair values:

 
Fair Value Measurements  at
March 31, 2012
 
Fair Value
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Marketable securities
$
11

 
$
11

 
$

 
$

Interest rate derivatives
36,550

 

 
36,550

 

Commodity derivatives:
 
 
 
 
 
 
 
Condensate — Forward Swaps
44

 

 
44

 

Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
47,657

 
47,657

 

 

Swing Swaps IFERC
19,093

 
2,856

 
16,237

 

Fixed Swaps/Futures
181,877

 
170,565

 
11,312

 

Options — Puts
6,765

 

 
6,765

 

Forward Physical Swaps
3,367

 

 
3,367

 

NGLs:
 
 
 
 
 
 
 
Forward Swaps
394

 

 
394

 

Options — Puts
880

 

 
880

 

Power:
 
 
 
 
 
 
 
Forwards
11,562

 
364

 
11,198

 

Options — Calls
107

 
107

 

 

Options — Puts
85

 
85

 

 

Total commodity derivatives
271,831

 
221,634

 
50,197

 

Total Assets
$
308,392

 
$
221,645

 
$
86,747

 
$

Liabilities:
 
 
 
 
 
 
 
Interest rate derivatives
$
(157,544
)
 
$

 
$
(157,544
)
 
$

Preferred Units
(326,950
)
 

 

 
(326,950
)
Embedded derivatives in the Regency Preferred Units
(38,553
)
 

 

 
(38,553
)
Commodity derivatives:
 
 
 
 
 
 
 
Condensate — Forward Swaps
(2,178
)
 

 
(2,178
)
 

Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(73,305
)
 
(73,305
)
 

 

Swing Swaps IFERC
(20,646
)
 
(5,024
)
 
(15,622
)
 

Fixed Swaps/Futures
(155,028
)
 
(116,877
)
 
(38,151
)
 

Options — Calls
(2
)
 

 
(2
)
 

Forward Physical Swaps
(918
)
 

 
(918
)
 

NGLs — Forward Swaps
(3,809
)
 

 
(3,809
)
 

Power:
 
 
 
 
 
 
 
Forwards
(11,152
)
 
(383
)
 
(10,769
)
 

Options — Calls
(40
)
 
(40
)
 

 

Propane — Forward Swaps
(879
)
 

 
(879
)
 

Total commodity derivatives
(267,957
)
 
(195,629
)
 
(72,328
)


Total Liabilities
$
(791,004
)
 
$
(195,629
)
 
$
(229,872
)
 
$
(365,503
)


15


 
Fair Value Measurements  at
December 31, 2011
 
Fair Value
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Marketable securities
$
1,229

 
$
1,229

 
$

 
$

Interest rate derivatives
36,301

 

 
36,301

 

Commodity derivatives:
 
 
 
 
 
 
 
Condensate — Forward Swaps
538

 

 
538

 

Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
62,924

 
62,924

 

 

Swing Swaps IFERC
15,002

 
1,687

 
13,315

 

Fixed Swaps/Futures
218,479

 
214,572

 
3,907

 

Options — Puts
6,435

 

 
6,435

 

Forward Physical Swaps
699

 

 
699

 

NGLs:
 
 
 
 
 
 
 
Forward Swaps
94

 

 
94

 

Options — Puts
309

 

 
309

 

Propane — Forward Swaps
9

 

 
9

 

Total commodity derivatives
304,489

 
279,183

 
25,306

 

Total Assets
$
342,019

 
$
280,412

 
$
61,607

 
$

Liabilities:
 
 
 
 
 
 
 
Interest rate derivatives
$
(117,490
)
 
$

 
$
(117,490
)
 
$

Preferred Units
(322,910
)
 

 

 
(322,910
)
Embedded derivatives in the Regency Preferred Units
(39,049
)
 

 

 
(39,049
)
Commodity derivatives:
 
 
 
 
 
 
 
Condensate — Forward Swaps
(1,567
)
 

 
(1,567
)
 

Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(82,290
)
 
(82,290
)
 

 

Swing Swaps IFERC
(16,074
)
 
(3,061
)
 
(13,013
)
 

Fixed Swaps/Futures
(148,111
)
 
(148,111
)
 

 

Options — Calls
(12
)
 

 
(12
)
 

Forward Physical Swaps
(712
)
 

 
(712
)
 

NGLs — Forward Swaps
(8,561
)
 

 
(8,561
)
 

Propane — Forward Swaps
(4,131
)
 

 
(4,131
)
 

Total commodity derivatives
(261,458
)
 
(233,462
)
 
(27,996
)
 

Total Liabilities
$
(740,907
)
 
$
(233,462
)
 
$
(145,486
)
 
$
(361,959
)
The following table presents the material unobservable inputs used to estimate the fair value of the Preferred Units and the embedded derivatives in Regency's Preferred Units:
 
Unobservable Input
 
March 31, 2012
Preferred Units
Yield
 
6.44
%
Embedded derivatives in the Regency Preferred Units
Credit Spread
 
6.89
%
 
Volatility
 
16.06
%


16


Changes in the remaining term of the Preferred Units, U.S. Treasury yields and valuations in related instruments would cause a change in the yield to value the Preferred Units. Changes in Regency's cost of equity and U. S. Treasury yields would cause a change in the credit spread used to value the embedded derivatives in the Regency Preferred Units. Changes in Regency's historical unit price volatility would cause a change in the volatility used to value the embedded derivatives.
The following table presents a reconciliation of the beginning and ending balances for our Level 3 financial instruments measured at fair value on a recurring basis using significant unobservable inputs for the three months ended March 31, 2012. There were no transfers between the fair value hierarchy levels during the three months ended March 31, 2012 or 2011.

Balance, December 31, 2011
$
(361,959
)
Net unrealized losses included in other income (expense)
(3,544
)
Balance, March 31, 2012
$
(365,503
)

  
9.
NET INCOME PER LIMITED PARTNER UNIT:
A reconciliation of net income and weighted average units used in computing basic and diluted net income per unit is as follows:
 
Three Months Ended March 31,
 
2012
 
2011
Basic Net Income per Limited Partner Unit:
 
 
 
Limited Partners’ interest in net income
$
165,916

 
$
88,366

Weighted average Limited Partner units
226,730,477

 
222,954,674

Basic net income per Limited Partner unit
$
0.73

 
$
0.40

Diluted Net Income per Limited Partner Unit:
 
 
 
Limited Partners’ interest in net income
$
165,916

 
$
88,366

Dilutive effect of equity-based compensation of subsidiaries
(846
)
 
(204
)
Diluted net income available to Limited Partners
$
165,070

 
$
88,162

Weighted average Limited Partner units
226,730,477

 
222,954,674

Diluted net income per Limited Partner unit
$
0.73

 
$
0.40

The calculation above for the three months ended March 31, 2012 for diluted net income per limited partner unit excludes the impact of any ETE Common Units that would be issued upon conversion of the Preferred Units, because inclusion would have been antidilutive. The Preferred Units have a liquidation preference of $300 million and are subject to mandatory conversion as discussed in Note 11.


17


10.
DEBT OBLIGATIONS:
Our debt obligations consisted of the following:
 
March 31,
2012
 
December 31,
2011
Parent Company Indebtedness:
 
 
 
ETE Senior Notes, due October 15, 2020
$
1,800,000

 
$
1,800,000

ETE Senior Secured Term Loan, due March 26, 2017
2,000,000

 

ETE Senior Secured Revolving Credit Facility

 
71,500

Subsidiary Indebtedness:
 
 
 
ETP Senior Notes (aggregated)
7,800,000

 
6,550,000

Transwestern Senior Unsecured Notes (aggregated)
870,000

 
870,000

HOLP Senior Secured Notes (aggregated)

 
71,314

Regency Senior Notes (aggregated)
1,350,000

 
1,350,000

Southern Union Senior Notes:
 
 
 
7.6% Senior Notes due February 1, 2024
359,765

 

8.25% Senior Notes due November 14, 2029
300,000

 

7.24% to 9.44% First Mortgage Bonds due February 15, 2020 to December 15, 2027
19,500

 

7.2% Junior Subordinated Notes due November 1, 2066
600,000

 

Notes Payable
7,603

 

Panhandle:
 
 
 
6.05% Senior Notes due August 15, 2013
250,000

 

6.2% Senior Notes due November 1, 2017
300,000

 

7.0% Senior Notes due June 15, 2018
400,000

 

8.125% Senior Notes due June 1, 2019
150,000

 

7.0% Senior Notes due July 15, 2029
66,305

 

Term Loan due February 23, 2015
455,000

 

Revolving Credit Facilities:
 
 
 
ETP Revolving Credit Facility
190,000

 
314,438

Regency Revolving Credit Facility
250,000

 
332,000

Southern Union Revolving Credit Facility
165,000

 

Other Long-Term Debt
704

 
10,434

Unamortized premiums (discounts), net
156,201

 
(10,309
)
Fair value adjustments related to interest rate swaps
10,244

 
11,647

 
17,500,322

 
11,371,024

Current maturities
(109,127
)
 
(424,160
)
 
$
17,391,195

 
$
10,946,864

The following table reflects future maturities of long-term debt for each of the next five years and thereafter. These amounts exclude $166.4 million in net unamortized premiums and fair value adjustments related to interest rate swaps:
2012 (remainder)
$
108,844

2013
600,944

2014
630,873

2015
1,205,863

2016
730,847

Thereafter
14,056,507

Total
$
17,333,878


18


ETE Senior Secured Term Loan
We used the net proceeds from our Senior Secured Term Loan, along with proceeds received from ETP in the Citrus Merger, to fund the cash portion of the Southern Union Merger and pay related fees and expenses, including existing borrowings under our revolving credit facility and for general partnership purposes.
Borrowings bear interest at either the Eurodollar rate plus an applicable margin or the alternative base rate plus an applicable margin. The alternative base rate used to calculate interest on base rate loans will be calculated using the greater of a prime rate, a federal funds effective rate plus 0.50%, and an adjusted one-month LIBOR rate plus 1.00%. The applicable margins are 3.0% for Eurodollar loans and from 2.0% for base rate loans. The effective interest rate on the amount outstanding as of March 31, 2012 was 3.75%.
Southern Union Junior Subordinated Notes
Southern Union has interest rate swap agreements that effectively fix the interest rate applicable to the floating rate on $525 million of the $600 million Junior Subordinated Notes due 2066. The interest rate on the remaining notes is a variable rate based upon the three-month LIBOR rate plus 3.0175%. The balance of the variable rate portion of the Junior Subordinated Notes was $75 million at an effective interest rate of 3.45% at March 31, 2012.
Panhandle Term Loans
In February 2012, Southern Union refinanced LNG Holdings' $455 million term loan due March 2012 with an unsecured three-year term loan facility due February 2015, with LNG Holdings as borrower and PEPL and Trunkline LNG as guarantors and a floating interest rate tied to LIBOR plus a margin based on the rating of PEPL's senior unsecured debt. The effective interest rate of PEPL's term loan was 1.87% at March 31, 2012.
Bridge Term Loan Facility
Upon obtaining permanent financing for the Southern Union Merger in March 2012, we terminated the 364-day Bridge Term Loan Facility. For the three months ended March 31, 2012, bridge loan related fees reflects $62.2 million representing amortization of the related commitment fees and write-off of the unamortized portion upon termination of the facility.
ETP Senior Notes
In January 2012, ETP completed a public offering of $1 billion aggregate principal amount of 5.20% Senior Notes due February 1, 2022 and $1 billion aggregate principal amount of 6.50% Senior Notes due February 1, 2042 and used the net proceeds of $1.98 billion from the offering to fund the cash portion of the purchase price of the Citrus Merger and for general partnership purposes. ETP may redeem some or all of the notes at any time and from time to time pursuant to the terms of the indenture subject to the payment of a “make-whole” premium. Interest will be paid semi-annually.
In January 2012, ETP announced a tender offer for approximately $750 million aggregate principal amount of specified series of the ETP Senior Notes. The tender offer consisted of two separate offers: an Any and All Offer and a Maximum Tender Offer. The senior notes described below were repurchased under the Any and All Offer and Maximum Tender Offer for a total cost of $885.9 million and a loss on extinguishment of debt of $115.0 million was recorded during the three months ended March 31, 2012.
In the Any and All Offer, ETP offered to purchase any and all of its 5.65% Senior Notes due August 1, 2012, at a fixed price. Pursuant to the Any and All Offer, ETP purchased $292 million aggregate principal amount of its 5.65% Senior Notes due August 1, 2012 on January 19, 2012.
In the Maximum Tender Offer, ETP offered to purchase certain series of outstanding ETP Senior Notes at a fixed spread over the index rate. Pursuant to the Maximum Tender Offer, on February 7, 2012, ETP purchased $200 million aggregate principal amount of its 9.7% Senior Notes due March 15, 2019, $200 million aggregate principal amount of its 9.0% Senior Notes due April 15, 2019 and $58.1 million aggregate principal amount of its 8.5% Senior Notes due April 15, 2014.
Revolving Credit Facilities
Parent Company Credit Agreement
As of March 31, 2012, we had no outstanding borrowings under the Parent Company Credit Facility and the amount available for future borrowings was $200 million.


19


ETP Credit Facility
As of March 31, 2012, ETP had a balance of $190.0 million outstanding under the ETP Credit Facility, and the amount available for future borrowings was $2.28 billion after taking into account letters of credit of $28.3 million. The weighted average interest rate on the total amount outstanding as of March 31, 2012 was 1.74%.
Regency Credit Facility
As of March 31, 2012, there was a balance outstanding under the Regency Credit Facility of $250.0 million in revolving credit loans and approximately $11.5 million in letters of credit. The total amount available under the Regency Credit Facility, as of March 31, 2012, which is reduced by any letters of credit, was approximately $638.5 million. The weighted average interest rate on the total amount outstanding as of March 31, 2012 was 3.09%.
Southern Union Credit Facilities
The Southern Union Credit Facility provides for a $700 million revolving credit facility which matures on May 20, 2016. Borrowings on the Southern Union Credit Facility are available for working capital, other general company purposes and letter of credit requirements. The interest rate and commitment fee under the Southern Union Credit Facility are calculated using a pricing grid, which is based on the credit ratings for Southern Union's senior unsecured notes. The annualized interest rate for the Southern Union Credit Facility was 1.86% as of March 31, 2012.
Covenants Related to Our Credit Agreements
Covenants Related to Southern Union
Southern Union is not party to any lending agreement that would accelerate the maturity date of any obligation due to a failure to maintain any specific credit rating, nor would a reduction in any credit rating, by itself, cause an event of default under any of Southern Union’s lending agreements. Covenants exist in certain of the Southern Union’s debt agreements that require Southern Union to maintain a certain level of net worth, to meet certain debt to total capitalization ratios and to meet certain ratios of earnings before depreciation, interest and taxes to cash interest expense. A failure by Southern Union to satisfy any such covenant would give rise to an event of default under the associated debt, which could become immediately due and payable if Southern Union did not cure such default within any permitted cure period or if Southern Union did not obtain amendments, consents or waivers from its lenders with respect to such covenants.
Southern Union’s restrictive covenants include restrictions on debt levels, restrictions on liens securing debt and guarantees, restrictions on mergers and on the sales of assets, capitalization requirements, dividend restrictions, cross default and cross-acceleration and prepayment of debt provisions. A breach of any of these covenants could result in acceleration of Southern Union’s debt and other financial obligations and that of its subsidiaries. Under the current credit agreements, the significant debt covenants and cross defaults are as follows:
Under the Southern Union Credit Facility, the consolidated debt to total capitalization ratio, as defined therein, cannot exceed 65%;
Under the Southern Union Credit Facility, Southern Union must maintain an earnings before interest, tax, depreciation and amortization interest coverage ratio of at least 2.00 times;
Under Southern Union’s First Mortgage Bond indentures for the Fall River Gas division of New England Gas Company, Southern Union’s consolidated debt to total capitalization ratio, as defined therein, cannot exceed 70% at the end of any calendar quarter; and
All of Southern Union’s major borrowing agreements contain cross-defaults if Southern Union defaults on an agreement involving at least $10 million of principal.
In addition to the above restrictions and default provisions, Southern Union and/or its subsidiaries are subject to a number of additional restrictions and covenants. These restrictions and covenants include limitations on additional debt at some of its subsidiaries; limitations on the use of proceeds from borrowing at some of its subsidiaries; limitations, in some cases, on transactions with its affiliates; limitations on the incurrence of liens; potential limitations on the abilities of some of its subsidiaries to declare and pay dividends and potential limitations on some of its subsidiaries to participate in Southern Union’s cash management program; and limitations on Southern Union’s ability to prepay debt.

20


Compliance with Our Covenants
We were in compliance with all requirements, tests, limitations, and covenants related to our respective credit agreements as of March 31, 2012.
11.
REDEEMABLE PREFERRED UNITS:
ETE Preferred Units
The Parent Company has outstanding 3,000,000 Series A Convertible Preferred Units to an affiliate of GE Energy Financial Services, Inc. having an aggregate liquidation preference of $300 million. These units are reflected as a non-current liability in our consolidated balance sheets. The Preferred Units are measured at fair value on a recurring basis. Changes in the estimated fair value of the ETE Preferred Units are recorded in other income (expense) on the consolidated statements of operations.
Regency Preferred Units
Regency had 4,371,586 Regency Preferred Units outstanding at March 31, 2012, which were convertible into 4,638,732 Regency Common Units. If outstanding on September 2, 2029, the Regency Preferred Units are mandatorily redeemable for $80 million plus all accrued but unpaid distributions thereon. Holders of the Regency Preferred Units receive fixed quarterly cash distributions of $0.445 per unit. Holders can elect to convert Regency Preferred Units to Regency Common Units at any time in accordance with Regency’s Partnership Agreement.

12.
EQUITY:
ETE Common Units Issued
The change in ETE Common Units during the three months ended March 31, 2012 was as follows:
 
Number of
Units
Outstanding at December 31, 2011
222,972,708

Issuance of restricted units under equity incentive plan
740

Issuance of common units in connection with Southern Union Merger (See Note 3)
56,981,860

Outstanding at March 31, 2012
279,955,308

Sales of Common Units by Subsidiaries
The Parent Company accounts for the difference between the carrying amount of its investments in ETP and Regency and the underlying book value arising from the issuance or redemption of units by ETP or Regency (excluding transactions with the Parent Company) as capital transactions.
As a result of ETP’s and Regency’s issuances of common units during the three months ended March 31, 2012, we recognized decreases in partners’ capital of $14.7 million.
Sales of Common Units by ETP
During the three months ended March 31, 2012, ETP received proceeds from units issued pursuant to an Equity Distribution Agreement with Credit Suisse of $76.7 million, net of commissions, which were used for general partnership purposes. No ETP Common Units remain available to be issued under the Equity Distribution Agreement as of March 31, 2012.
For the three months ended March 31, 2012, distributions of approximately $10.6 million were reinvested under its DRIP resulting in the issuance of 238,314 ETP Common Units. As of March 31, 2012, a total of 5,158,007 ETP Common Units remain available to be issued under this agreement.
ETP issued approximately 2.25 million ETP Common Units to Southern Union as consideration for approximately $105 million in the Citrus Merger. See Note 3 for additional discussion.

21


Sale of Common Units by Regency
In March 2012, Regency issued 12,650,000 Regency Common Units through a public offering. The net proceeds of approximately $297.3 million were used to repay borrowings outstanding under the Regency Credit Facility and will be used to redeem 35% in aggregate principal amount of its outstanding Senior Notes due 2016 and pay related premium expenses and interest. Regency expects to complete this redemption in May 2012.
Parent Company Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by us subsequent to December 31, 2011:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2011
 
February 7, 2012
 
February 17, 2012
 
$
0.625

March 31, 2012
 
May 4, 2012
 
May 18, 2012
 
0.625

ETP Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by ETP subsequent to December 31, 2011:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2011
 
February 7, 2012
 
February 14, 2012
 
$
0.89375

March 31, 2012
 
May 4, 2012
 
May 15, 2012
 
0.89375


Regency Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by Regency subsequent to December 31, 2011:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2011
 
February 6, 2012
 
February 13, 2012
 
$
0.46

March 31, 2012
 
May 7, 2012
 
May 14, 2012
 
0.46


Accumulated Other Comprehensive Income
The following table presents the components of AOCI, net of tax:
 
 
March 31, 2012
 
December 31, 2011
Net gains on commodity related hedges
$
23,409

 
$
1,696

Unrealized gains on available-for-sale securities

 
114

Subtotal
23,409

 
1,810

Amounts attributable to noncontrolling interest
(16,839
)
 
(1,132
)
Total AOCI included in partners’ capital, net of tax
$
6,570

 
$
678

 
 
13.
UNIT-BASED COMPENSATION PLANS:
We, ETP, and Regency have equity incentive plans for employees, officers and directors, which provide for various types of awards, including options to purchase common units, restricted units, phantom units, DERs, common unit appreciation rights, and other unit-based awards.
ETE Long-Term Incentive Plan
During the three months ended March 31, 2012, no awards were granted to ETE employees. As of March 31, 2012 a total of 76,172 unit awards remain unvested, including the new awards granted to ETE directors during the period. We expect to recognize a total of $1.0 million in compensation expense over a weighted average period of 1.9 years related to unvested awards.

22


ETP Unit-Based Compensation Plans
During the three months ended March 31, 2012, ETP employees were granted a total of 14,917 unvested awards with five-year service vesting requirements, and directors were granted a total of 2,120 unvested awards with three-year service vesting requirements. The weighted average grant-date fair value of these awards was $46.30 per unit. As of March 31, 2012 a total of 2,377,124 unit awards remain unvested, including the new awards granted during the period. ETP expects to recognize a total of $70.1 million in compensation expense over a weighted average period of 1.8 years related to unvested awards.
Regency Unit-Based Compensation Plans
Common Unit Options
There was no Regency Common Unit Option activity for the three months ended March 31, 2012. The aggregate intrinsic value and weighted average contractual term in years as of March 31, 2012 for the outstanding and exercisable common unit options was $0.5 million and 4.1,years respectively. During the three months ended March 31, 2011, Regency received $0.5 million in proceeds from the exercise of unit options.
Phantom Units
During the three months ended March 31, 2012, Regency employees and directors were granted 4,000 Regency phantom units with three-year service vesting requirements. As of March 31, 2012, a total of 1,061,404 Regency Phantom Units remain unvested, with a weighted average grant date fair value of $24.56. Regency expects to recognize a total of $19.1 million in compensation expense over a weighted average period of 4.1 years related to Regency’s unvested phantom units.


14.
BENEFITS:
Southern Union has pension plans that cover substantially all of its distribution operations' employees. Normal retirement age is 65, but certain plan provisions allow for earlier retirement. Pension benefits are calculated under formulas principally based on average earnings and length of service for salaried and non-union employees and average earnings and length of service or negotiated non-wage based formulas for union employees.
Southern Union has other postretirement plans that cover most of its employees. The health care plans generally provide for cost sharing between Southern Union and its retirees in the form of retiree contributions, deductibles, coinsurance, and a fixed cost cap on the amount Southern Union pays annually to provide future retiree health care coverage under certain of these plans.
Pension and other postretirement benefit liabilities are accrued on an actuarial basis during the years an employee provides services. The following table contains information at the acquisition date (March 26, 2012) about the obligations and funded status of Southern Union’s pension and other postretirement plans on a combined basis:
 
Pension Benefits
 
Other Postretirement Benefits
Benefit obligation
$
227,548

 
$
140,651

Fair value of plan assets
$
143,979

 
$
118,784

Amount underfunded
$
(83,569
)
 
$
(21,867
)
Amounts recognized in our consolidated balance sheet related to Southern Union's pension and other postretirement plans consist of:
 
 
 
Non-current assets
$

 
$
6,062

Current liabilities

 
(133
)
Non-current liabilities
(83,569
)
 
(27,796
)
 
$
(83,569
)
 
$
(21,867
)

23


The following table summarizes information at the acquisition date (March 26, 2012) for plans with an accumulated benefit obligation in excess of the plan assets:
 
Pension Benefits
 
Other Postretirement Benefits
Projected benefit obligation
$
227,548

 
N/A

Accumulated benefit obligation
213,614

 
$
110,314

Fair value of plan assets
143,979

 
82,385

Assumptions
The following table includes weighted average assumptions used in determining benefit obligations as of the acquisition date (March 26, 2012):
 
Pension Benefits
 
Other Postretirement Benefits
Discount rate
4.10
%
 
4.10
%
Rate of compensation increase
3.03
%
 
N/A


The assumed health care cost trend rates used to measure the expected cost of benefits covered by Southern Union's other postretirement benefit plans as of the acquisition date (March 26, 2012) are shown in the table below:
Health care cost rend rate assumed for next year
9.00
%
Rate to which the cost trend is assumed to decline (the ultimate trend rate)
4.85
%
Year that the rate reaches the ultimate trend rate
2020


Defined Contribution Plan
Employees of Southern Union and its subsidiaries participate in a company-sponsored defined contribution savings plan that is substantially similar to the 401(k) savings plan that covers the employees of ETE, ETP and Regency.

 
15.
INCOME TAXES:
The components of the federal and state income tax expense of our taxable subsidiaries are summarized as follows:
 
Three Months Ended March 31,
 
2012
 
2011
Current expense (benefit):
 
 
 
Federal
$
(19
)
 
$
5,102

State
3,736

 
3,996

Total
3,717

 
9,098

Deferred expense (benefit):
 
 
 
Federal
(8,565
)
 
188

State
6,427

 
617

Total
(2,138
)
 
805

Total income tax expense
$
1,579

 
$
9,903


Our effective tax rate has historically differed from the statutory rate due primarily to Partnership earnings that are not subject to federal and state income taxes at the Partnership level. The acquisition of Southern Union on March 26, 2012 is expected to increase our overall effective rate going forward, because Southern Union is subject to federal and state income taxes.

24


In connection with the Southern Union Merger, we recorded a net deferred tax liability of approximately $1.77 billion, which was primarily related to property, plant and equipment. Southern Union has deferred tax net operating loss carry forwards of approximately $65 million as of March 31, 2012, of which $15 million and $50 million expire in 2030 and 2031, respectively.
As of March 31, 2012, Southern Union has unrecognized tax benefits for capitalization policies and state filing positions of $2.3 million and $17.1 million, respectively, which relate to tax positions taken by Southern Union or its subsidiaries prior to our acquisition on March 26, 2012.

16.
REGULATORY MATTERS, COMMITMENTS, CONTINGENCIES AND ENVIRONMENTAL LIABILITIES:
Regulatory Matters
Southern Union and its Subsidiaries
Sea Robin Pipeline, a subsidiary of Southern Union, is recovering Hurricane Ike-related costs not otherwise recovered from insurance proceeds or from other third parties, as well as applicable carrying charges, through a rate surcharge approved by the FERC. As of March 31, 2012, our consolidated balance sheet reflects approximately $44.8 million of costs to be recovered by Sea Robin Pipeline in future periods via the surcharge.
The FERC is currently conducting an audit of PEPL, a subsidiary of Southern Union, to evaluate its compliance with the Uniform System of Accounts as prescribed by the FERC, annual and quarterly financial reporting to the FERC, reservation charge crediting policy and record retention. The audit is related to the period from January 1, 2010 to present and is expected to take approximately one year to complete.
Contingent Residual Support Agreement — AmeriGas
AmeriGas Finance LLC, a wholly owned subsidiary of AmeriGas, issued $550 million in aggregate principal amount of 6.75% senior notes due 2020 and $1.0 billion in aggregate principal amount of 7.00% senior notes due 2022. AmeriGas borrowed $1.5 billion of the proceeds of the Senior Notes issuance from Finance Company through an intercompany borrowing having maturity dates and repayment terms that mirror those of the Senior Notes.
In connection with the Propane Contribution, ETP entered into a CRSA with AmeriGas, AmeriGas Finance LLC, AmeriGas Finance Corp. and UGI Corp., pursuant to which ETP will provide contingent, residual support of the Supported Debt, as defined in the CRSA.
Commitments
In the normal course of our business, our operating entities purchase, process and sell natural gas pursuant to long-term contracts and enter into long-term transportation and storage agreements. Such contracts contain terms that are customary in the industry. We believe that the terms of these agreements are commercially reasonable and will not have a material adverse effect on our financial position or results of operations.
We have certain non-cancelable leases for property and equipment, which require fixed monthly rental payments and expire at various dates through 2029. Rental expense under these operating leases has been included in operating expenses in the accompanying statements of operations and totaled approximately $6.7 million and $5.4 million for the three months ended March 31, 2012 and 2011, respectively.
Future minimum lease commitments for such leases are:
Years Ending December 31:
 
2012 (remainder)
$
26,491

2013
37,990

2014
33,192

2015
31,708

2016
30,770

Thereafter
211,600

Certain of our subsidiaries' joint venture agreements require that they fund their proportionate shares of capital contributions to their unconsolidated affiliates. Such capital contributions will depend upon their unconsolidated affiliates’ capital requirements, such as for funding capital projects or repayment of long-term obligations.

25


Litigation and Contingencies
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. Natural gas and NGLs are flammable, combustible gases. Serious personal injury and significant property damage can arise in connection with their transportation, storage or use. In the ordinary course of business, we are sometimes threatened with or named as a defendant in various lawsuits seeking actual and punitive damages for product liability, personal injury and property damage. We maintain liability insurance with insurers in amounts and with coverage and deductibles management believes are reasonable and prudent, and which are generally accepted in the industry. However, there can be no assurance that the levels of insurance protection currently in effect will continue to be available at reasonable prices or that such levels will remain adequate to protect us from material expenses related to product liability, personal injury or property damage in the future.
We or our subsidiaries are a party to various legal proceedings and/or regulatory proceedings incidental to our businesses. For each of these matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, the likelihood of an unfavorable outcome and the availability of insurance coverage. If we determine that an unfavorable outcome of a particular matter is probable and can be estimated, we accrue the contingent obligation, as well as any expected insurance recoverable amounts related to the contingency. As of March 31, 2012 and December 31, 2011, accruals of approximately $28.3 million and $18.2 million, respectively, were reflected on our consolidated balance sheets related to these contingent obligations. As new information becomes available, our estimates may change. The impact of these changes may have a significant effect on our results of operations in a single period.
The outcome of these matters cannot be predicted with certainty, and there can be no assurance that the outcome of a particular matter will not result in the payment of amounts that have not been accrued for the matter. Furthermore, we may revise accrual amounts prior to the resolution of a particular contingency based on changes in facts and circumstances or in the expected outcome.
No amounts have been recorded in our March 31, 2012 or December 31, 2011 consolidated balance sheets for contingencies and current litigation, other than amounts disclosed herein. Following is a discussion or our legal proceedings:
Will Price. Will Price, an individual, filed actions in the U.S. District Court for the District of Kansas for damages against a number of companies, including Panhandle, alleging mis-measurement of natural gas volumes and Btu content, resulting in lower royalties to mineral interest owners. On September 19, 2009, the Court denied plaintiffs’ request for class certification. Plaintiffs have filed a motion for reconsideration, which the Court denied on March 31, 2010. Panhandle believes that its measurement practices conformed to the terms of its FERC natural gas tariffs, which were filed with and approved by the FERC. As a result, Southern Union believes that it has meritorious defenses to the Will Price lawsuit (including FERC-related affirmative defenses, such as the filed rate/tariff doctrine, the primary/exclusive jurisdiction of the FERC, and the defense that Panhandle complied with the terms of its tariffs). In the event that Plaintiffs refuse Panhandle’s pending request for voluntary dismissal, Panhandle will continue to vigorously defend the case. Southern Union believes it has no liability associated with this proceeding.
Attorney General of the Commonwealth of Massachusetts v New England Gas Company. On July 7, 2011, the Massachusetts Attorney General filed a regulatory complaint with the MDPU against New England Gas Company with respect to certain environmental cost recoveries. The Attorney General is seeking a refund to New England Gas Company customers for alleged “excessive and imprudently incurred costs” related to legal fees associated with Southern Union’s environmental response activities. In the complaint, the Attorney General requests that the MDPU initiate an investigation into the New England Gas Company’s collection and reconciliation of recoverable environmental costs including: (i) the prudence of any and all legal fees, totaling $18.5 million, that were charged by the Kasowitz, Benson, Torres & Friedman firm and passed through the recovery mechanism since 2005, the year when a partner in the firm, Southern Union’s current Vice Chairman, President and COO, joined Southern Union’s management team; (ii) the prudence of any and all legal fees that were charged by the Bishop, London & Dodds firm and passed through the recovery mechanism since 2005, the period during which a member of the firm served as Southern Union’s Chief Ethics Officer; and (iii) the propriety and allocation of certain legal fees charged that were passed through the recovery mechanism that the Attorney General contends only would qualify for a lesser, 50%, level of recovery. Southern Union has filed its answer denying the allegations and moved to dismiss the complaint, in part on a theory of collateral estoppel. The Attorney General’s motion to be reimbursed for expert and consultant costs by Southern Union of up to $150,000 was granted. The hearing officer has stayed discovery until resolution of a separate matter concerning the applicability of attorney-client privilege to legal billing invoices. Southern Union believes it has complied with all applicable requirements regarding its filings for cost recovery and has not recorded any accrued liability; however, Southern Union will continue to assess its potential exposure for such cost recoveries as the matter progresses.
Air Quality Control. SUGS is currently negotiating settlements to certain enforcement actions by the NMED and the TCEQ.

26


Compliance Orders from the New Mexico Environmental Department. SUGS has been in discussions with the New Mexico Environmental Department concerning allegations of violations of New Mexico air regulations related to the Jal #3 and Jal #4 facilities. The New Mexico Environmental Department has issued amended compliance orders and proposed penalties for alleged violations at Jal #4 in the amount of $0.5 million and at Jal #3 in the amount of $5.5 million. Hearings on the compliance orders were delayed until September 2012 to allow the parties to pursue substantive settlement discussions. SUGS has meritorious defenses to the New Mexico Environmental Department claims and can offer significant mitigating factors to the claimed violations. SUGS has recorded an accrued liability and will continue to assess its potential exposure to the allegations as the matter progresses.
FGT Phase VIII Expansion.  FGT Phase VIII Expansion project was placed in-service on April 1, 2011, at an approximate cost of $2.5 billion, including capitalized equity and debt costs. To date, FGT has entered into long-term firm transportation service agreements with shippers for 25-year terms accounting for approximately 74% of the available expansion capacity.
 In 2011, CrossCountry and Citrus' other stockholder each made sponsor contributions of $37 million in the form of loans to Citrus, net of repayments.  The contributions are related to the costs of FGT's Phase VIII Expansion project.  In conjunction with anticipated sponsor contributions, Citrus has entered into a promissory note in favor of each stockholder for up to $150 million. The promissory notes have a final maturity date of March 31, 2014, with no principal payments required prior to the maturity date, and bear an interest rate equal to a one-month Eurodollar rate plus a credit spread of 1.5%. Amounts may be redrawn periodically under the notes to temporarily fund capital expenditures, debt retirements, or other working capital needs. 
FGT Pipeline Relocation Costs. The FDOT/FTE has various turnpike/State Road 91 widening projects that have impacted or may, over time, impact one or more of FGT's mainline pipelines located in FDOT/FTE rights-of-way. Several FDOT/FTE projects are the subject of litigation in Broward County, Florida. On January 27, 2011, a jury awarded FGT $82.7 million and rejected all damage claims by the FDOT/FTE. On May 2, 2011, the judge issued an order entitling FGT to an easement of 15 feet on either side of its pipelines and 75 feet of temporary work space. The judge further ruled that FGT is entitled to approximately $8 million in interest. In addition to ruling on other aspects of the easement, he ruled that pavement could not be placed directly over FGT's pipeline without the consent of FGT although FGT would be required to relocate the pipeline if it did not provide such consent. He also denied all other pending post-trial motions. The FDOT/FTE filed a notice of appeal on July 12, 2011. Briefing to the Florida Fourth District Court of Appeals is complete. The Florida Fourth District Court of Appeals granted a request by the FDOT to expedite the appeal. Oral argument was held March 7, 2012. Amounts ultimately received would primarily reduce FGT's property, plant and equipment costs.
W. J. Garrett Trust. On November 28, 2011, W.J. Garrett Trust filed a lawsuit in Texas state court derivatively and on behalf of ETP unitholders.  This lawsuit is W.J. Garrett Trust, et al. v. Bill W. Byrne, Paul E. Glaske, Kelcy L. Warren, David R. Albin, Michael K. Grimm, Ted Collins, Jr., Ray C. Davis, Marshall S. McCrea III, K. Rick Turner, ETE, Southern Union, ETP GP, ETP LLC and ETP, case number 2011-71702, in the 157th Judicial District Court of Harris County, Texas.  Plaintiff alleges a variety of causes of action challenging the Citrus Acquisition and ETP's divesture of its Propane Business to Amerigas (the “Propane Transactions”).  Specifically, plaintiff alleges that the Propane Transactions involved an unfair price and alleges several deficiencies in the process by which the named directors and officers are conducting the Propane Transactions.  Additionally, plaintiff alleges that: (i) the named directors and officers breached their fiduciary duties and their contractual duties in connection with the Propane Transactions; (ii) the named entities aided and abetted these breaches of the directors' and officers' fiduciary and contractual duties; (iii) Southern Union and ETE tortiously interfered with ETP's partnership agreement; and (iv) the defendants conspired to breach fiduciary and contractual duties.  Plaintiff also seeks a declaration that the defendant breached their fiduciary and contractual duties. 
 
On January 30, 2012, defendants filed a motion to stay discovery and special exceptions challenging the sufficiency of plaintiff's claims.  On March 5, 2012, Judge Reece Rondon of the 234th Judicial District Court of Harris County, Texas (the state court judge originally assigned the case) heard oral argument on defendants' motions.  Immediately following the hearing, Judge Rondon recused himself and transferred the case to Judge Randy Wilson of the 157th Judicial District Court of Harris County, Texas.  On April 3, 2012, Judge Wilson heard oral argument on defendants' motions and the parties are awaiting ruling from the court on the motions.

27


El Paso. CrossCountry, the Southern Union subsidiary that indirectly owns a 50% interest in Citrus, filed a petition in the Delaware Court of Chancery seeking a declaratory judgment against El Paso, the owner of the other 50% interest of Citrus, that the Citrus Merger did not breach El Paso's rights under a joint venture agreement related to Citrus. This petition was filed by CrossCountry following an exchange of letters between CrossCountry, El Paso and Southern Union in which El Paso stated that it believed the Citrus Merger violated the provisions of the joint venture agreement. Subsequently, El Paso filed a petition asserting a counterclaim action against CrossCountry, ETP and ETE based on its claim that the Citrus Merger violated El Paso's right of first refusal and, in such petition, El Paso sought a rescission of the Citrus Merger or, alternatively, damages.
On April 18, 2012, the parties to the declaratory judgment action and related counterclaim action entered into a joint stipulation pursuant to which El Paso agreed that the Citrus Merger did not breach the joint venture agreement and that El Paso was not entitled to rescission or damages with respect to the Citrus Merger. On April 20, 2012, the Delaware court granted an order approving the joint stipulation and, as a result, all litigation with respect to the Citrus Merger has been terminated.
Environmental Matters
Our operations are subject to extensive federal, state and local environmental and safety laws and regulations that require expenditures to ensure compliance, including related to air emissions and wastewater discharges, at operating facilities and for remediation at current and former facilities as well as waste disposal sites. Although we believe our operations are in substantial compliance with applicable environmental laws and regulations, risks of additional costs and liabilities are inherent in the business of transporting, storing, gathering, treating, compressing, blending and processing natural gas, natural gas liquids and other products. As a result, there can be no assurance that significant costs and liabilities will not be incurred. Costs of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, the issuance of injunctions and the filing of federally authorized citizen suits. Moreover, there can be no assurance that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations, will not result in substantial costs and liabilities. We are unable to estimate any losses or range of losses that could result from such developments. Furthermore, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome.
Our subsidiaries have adopted policies, practices and procedures in the areas of pollution control, product safety, occupational safety and health, and the handling, storage, use, and disposal of hazardous materials to prevent and minimize material environmental or other damage, and to limit the financial liability, which could result from such events. However, the risk of environmental or other damage is inherent in transporting, gathering, treating, compressing, blending and processing natural gas, natural gas liquids and other products, as it is with other entities engaged in similar businesses.
Environmental exposures and liabilities are difficult to assess and estimate due to unknown factors such as the magnitude of possible contamination, the timing and extent of remediation, the determination of our subsidiaries' liability in proportion to other parties, improvements in cleanup technologies and the extent to which environmental laws and regulations may change in the future.
The EPA's Spill Prevention, Control and Countermeasures program regulations were recently modified and impose additional requirements on many of our facilities. We expect to expend resources on tank integrity testing and any associated corrective actions as well as potential upgrades to containment structures to comply with the new rules. Costs associated with tank integrity testing and resulting corrective actions cannot be reasonably estimated at this time, but we believe such costs will not have a material adverse effect on our financial position, results of operations or cash flows.
On August 20, 2010, the EPA published new regulations under the CAA to control emissions of hazardous air pollutants from existing stationary reciprocal internal combustion engines. The rule will require some of our subsidiaries to undertake certain expenditures and activities, likely including purchasing and installing emissions control equipment. In response to an industry group legal challenge to portions of the rule in the U.S. Court of Appeals for the D.C. Circuit and a Petition for Administrative Reconsideration to the EPA, on March 9, 2011, the EPA issued a new proposed rule and a direct final rule effective on May 9, 2011 to clarify compliance requirements related to operation and maintenance procedures for continuous parametric monitoring systems. If no further changes to the standard are made as a result of comments to the proposed rule, we would not expect that the cost to comply with the rule's requirements will have a material adverse effect on our financial condition or results of operations. Compliance with the final rule is required by October 2013.

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On June 29, 2011, the EPA finalized a rule under the CAA that revised the new source performance standards for manufacturers, owners and operators of new, modified and reconstructed stationary internal combustion engines. The rule became effective on August 29, 2011. The rule modifications may require some of our subsidiaries to undertake significant expenditures, including expenditures for purchasing, installing, monitoring and maintaining emissions control equipment, if equipment is replaced or existing facilities are expanded in the future. At this point, we are not able to predict the cost to comply with the rule’s requirements, because the rule applies only to changes our subsidiaries might make in the future.
On April 17, 2012 the EPA issued the Oil and Natural Gas Sector New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants. The standards revise the new source performance standards for volatile organic compounds from leaking components at onshore natural gas processing plants and new source performance standards for sulfur dioxide emissions from natural gas processing plants. The EPA also established standards for certain oil and gas operations not covered by the existing standards. In addition to the operations covered by the existing standards, the newly established standards regulate volatile organic compound emissions from gas wells, centrifugal compressors, reciprocating compressors, pneumatic controllers and storage vessels. ETP is reviewing the new standards to determine the impact on its operations.
Our subsidiaries' pipeline operations are subject to regulation by the DOT under the PHMSA, pursuant to which the PHMSA has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities. Moreover, the PHMSA, through the Office of Pipeline Safety, has promulgated a rule requiring pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rule refers to as “high consequence areas.” Activities under these integrity management programs involve the performance of internal pipeline inspections, pressure testing or other effective means to assess the integrity of these regulated pipeline segments, and the regulations require prompt action to address integrity issues raised by the assessment and analysis. Integrity testing and assessment of all of these assets will continue, and the potential exists that results of such testing and assessment could cause our subsidiaries to incur future capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of pipelines; however, no estimate can be made at this time of the likely range of such expenditures.
Environmental Remediation
Our subsidiaries are responsible for environmental remediation at certain sites, including the following:
Certain of our interstate pipelines conduct soil and groundwater remediation related to contamination from past uses of PCBs. PCB assessments are ongoing and, in some cases, our subsidiaries could potentially be held responsible for contamination caused by other parties.
Certain gathering and processing systems are responsible for soil and groundwater remediation related to releases of hydrocarbons.
Southern Union's distribution operations are responsible for soil and groundwater remediation at certain sites related to MGPs and may also be responsible for the removal of old MGP structures.
To the extent estimable, expected remediation costs are included in the amounts recorded for environmental matters in our consolidated balance sheets. In some circumstances, future costs cannot be reasonably estimated because remediation activities are undertaken as claims are made by customers and former customers. To the extent that an environmental remediation obligation is recorded by a subsidiary that applies regulatory accounting policies, amounts that are expected to be recoverable through tariffs or rates are recorded as regulatory assets on our consolidated balance sheets.
The table below reflects the amounts of accrued liabilities recorded in our consolidated balance sheets related to environmental matters that are considered to be probable and reasonably estimable. Except for matters discussed above, we do not have any material environmental matters assessed as reasonably possible that would require disclosure in our consolidated financial statements.
 
March 31, 2012
 
December 31, 2011
Current
$
8,577

 
$
3,861

Non-current
23,341

 
9,990

Total environmental liabilities
$
31,918

 
$
13,851


 

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17.
PRICE RISK MANAGEMENT ASSETS AND LIABILITIES:
Commodity Price Risk
We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, our subsidiaries utilize various exchange-traded and OTC commodity financial instrument contracts. These contracts consist primarily of futures, swaps and options and are recorded at fair value in our consolidated balance sheets. Following is a description of price risk management activities by operating entity.
ETP
ETP injects and holds natural gas in its Bammel storage facility to take advantage of contango markets (i.e., when the price of natural gas is higher in the future than the current spot price. ETP uses financial derivatives to hedge the natural gas held in connection with these arbitrage opportunities.). At the inception of the hedge, ETP will lock in a margin by purchasing gas in the spot market or off peak season and entering into a financial contract to lock in the sale price. If ETP designates the related financial contract as a fair value hedge for accounting purposes, ETP will value the hedged natural gas inventory at current spot market prices along with the financial derivative it uses to hedge it. Changes in the spread between the forward natural gas prices designated as fair value hedges and the physical inventory spot price result in unrealized gains or losses until the underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled, the previously unrealized gains or losses associated with these positions are realized. Unrealized margins represent the unrealized gains or losses from ETP’s derivative instruments using mark-to-market accounting, with changes in the fair value of its derivatives being recorded directly in earnings. These margins fluctuate based upon changes in the spreads between the physical spot price and forward natural gas prices. If the spread narrows between the physical and financial prices, ETP will record unrealized gains or lower unrealized losses. If the spread widens, ETP will record unrealized losses or lower unrealized gains. Typically, as ETP enters the winter months, the spread converges so that it recognizes in earnings the original locked-in spread through either mark-to-market adjustments or the physical withdrawal of natural gas.
ETP is also exposed to market risk on natural gas it retains for fees in its intrastate transportation and storage operations and operational gas sales in its interstate transportation operations. ETP uses financial derivatives to hedge the sales price of this gas, including futures, swaps and options. Certain contracts that qualify for hedge accounting are designated as cash flow hedges of the forecasted sale of natural gas. The change in value, to the extent the contracts are effective, remains in AOCI until the forecasted transaction occurs. When the forecasted transaction occurs, any gain or loss associated with the derivative is recorded in cost of products sold in our consolidated statements of operations.
ETP's trading activities include the use of financial commodity derivatives to take advantage of market opportunities. These trading activities are a complement to ETP's transportation and storage operations and are netted in cost of products sold in our consolidated statements of operations. Additionally, ETP also has trading activities related to power in its "All Other" operations which are also netted in costs of products sold. As a result of ETP's trading activities and the use of derivative financial instruments in ETP's transportation and storage operations, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from period to period. ETP attempts to manage this volatility through (i) the use of daily position and profit and loss reports provided to its risk oversight committee, which includes members of senior management, and (ii) the limits and authorizations set forth in ETP's commodity risk management policy.
Derivatives are utilized in ETP’s midstream operations in order to mitigate price volatility and manage fixed price exposure incurred from contractual obligations. ETP attempts to maintain balanced positions in its marketing activities to protect against volatility in the energy commodities markets; however, net unbalanced positions can exist. Long-term physical contracts are tied to index prices. System gas, which is also tied to index prices, is expected to provide most of the gas required by its long-term physical contracts. When third-party gas is required to supply long-term contracts, a hedge is put in place to protect the margin on the contract. To the extent that financial contracts are not tied to physical delivery volumes, ETP may engage in offsetting financial contracts to balance its positions. To the extent open commodity positions exist, fluctuating commodity prices can impact its financial position and results of operations, either favorably or unfavorably.
ETP uses propane futures contracts to secure the purchase price of its propane inventory for a percentage of the anticipated sales by its cylinder exchange business. Prior to the deconsolidation of the Propane Business, ETP also used propane futures contracts to fix the purchase price related to certain fixed price sales contracts.

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The following table details ETP’s outstanding commodity-related derivatives:
 
March 31, 2012
 
December 31, 2011
 
Notional
Volume