Pipeline operator Energy Transfer Partners L.P. ( ETP - Analyst Report ) announced lackluster first quarter 2012 results, hurt by weak contributions from the natural gas business, reduced gross margin at Intrastate Transportation and Storage segment and higher selling and administrative costs.

The owner of the biggest intrastate pipeline system in Texas reported earnings per unit, excluding special items, of 25 cents, down 64.8% from 71 cents in the prior-year quarter. The results were way below our earnings estimate of 48 cents.

Quarterly revenues of $1,305.9 million missed our projection of $1,748.0 million. Comparing year over year, sales decreased 22.6% from $1,687.6 million, also due to lower natural gas sales.

Quarterly Cash Distribution

Last month, Energy Transfer announced first 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 will be paid on May 15, to unit holders of record on May 4.

EBITDA & Operating Income

Adjusted EBITDA for the quarter was $536.1 million, compared with $471.3 million in the year-ago quarter, reflecting robust performances from most of the business units.

However, operating income of $253.9 million plunged 30.1% from the first quarter of 2011.

Distributable Cash Flow

Energy Transfer Partners reported distributable cash flows of $320.5 million in the quarter, down from $337.1 million in the prior-year quarter.

Capital Expenditure

During the quarter, maintenance capital expenditure totaled $20.1 million, down 46.8% year over year.

Balance Sheet

As of March 31, 2012, Energy Transfer had long-term debt (less current maturities) of $8,741.5 million. Debt-to-capitalization ratio was 54.0%.

Our Recommendation

We believe that the near- to medium-term outlook for Energy Transfer Partners’s natural gas gathering and processing business continues to be clouded and remains a major liability. Moreover, the uncertain macro environment and cost overruns on expansion projects are other 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.