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Pipeline operator Energy Transfer Partners L.P. (ETP - Analyst Report) announced disappointing fourth quarter and full year 2011 results, hurt by weak Intrastate Transportation and Storage business and higher operating expenses.

The owner of the biggest intrastate pipeline system in Texas reported earnings per unit of 41 cents, down 36.9% from 65 cents in the prior-year quarter. The results were way below our earnings estimate of 67 cents.

For full-year 2011, the company posted earnings of $1.10 per unit, against earnings of $1.19 in the prior year. The reported results also missed our earnings projection of $1.46 per unit.

Quarterly revenues of $1,819.4 million missed our projection of $2,086.0 million. However, comparing year over year, sales shot up 25.1% from $1,454.5 million, aided by strong natural gas liquids operations.

Energy Transfer generated revenues of $6,850.4 million in fiscal 2011, compared with $5,884.8 million in 2010. However, the fiscal result failed to meet the Zacks Consensus Estimate of $7,286.0 million.

Quarterly Cash Distribution

Last month, Energy Transfer announced fourth quarter distribution of 89.375 cents per unit ($3.575 per unit annualized), which remains unchanged from the year-earlier and previous quarter distributions. The distribution was paid on February 14, to unit holders of record on February 7.

EBITDA & Operating Income

Adjusted EBITDA for the quarter was $479.0 million, compared with $411.1 million in the year-ago quarter.

Operating income of $338.9 million escalated 10.6% from the fourth quarter of 2010, reflecting significant growth in Energy Transfer’s Interstate Transportation and Midstream business units.

Distributable Cash Flow

Energy Transfer Partners reported distributable cash flows of $310.4 million in the quarter, up from $284.4 million in the prior-year quarter.

Capital Expenditure

During the quarter, maintenance capital expenditure totaled $53.6 million, up 84.9% year over year.

Balance Sheet

As of December 31, 2011, Energy Transfer had long-term debt (less current maturities) of $7,388.2 million. Debt-to-capitalization ratio was 53.8%.

Our Recommendation

We expect Energy Transfer Partners to have a challenging time ahead based on a cautious outlook on the natural gas gathering and processing business. Moreover, the uncertain macro environment and cost overruns on expansion projects remain major areas of concern.

Counterbalancing these negative aspects, we remain optimistic about the partnership’s growth in the coming months aided by multiple acquisitions and joint ventures, organic growth, strong volume expansion and modest price increases.

Energy Transfer Partners –– which competes with other large-cap pipeline master limited partnership peers like Enterprise Products Partners L.P. (EPD - Analyst Report), Kinder Morgan Energy Partners L.P. (KMP - Analyst Report) and Plains All American Pipeline L.P. (PAA - Analyst Report) –– currently retains a Zacks #3 Rank (short-term Hold rating). Longer-term, we maintain our Neutral recommendation on the partnership.

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