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Natural gas pipeline operator Energy Transfer Partners L.P. (ETP - Analyst Report) announced weak third quarter 2012 results, owing to deteriorating natural gas market conditions and reduced gross margin at Intrastate Transportation and Storage segment.

The partnership reported a loss of 33 cents per limited partner unit in contrast to the Zacks Consensus Estimate of earnings of 30 cents. Reported loss was wider than a loss of 19 cents in the year-ago quarter.

Quarterly revenues of $1,420.5 million were below our projection of $1,731.0 million. Comparing year over year, sales decreased 16.5% from $1,701.5 million, due to low natural gas sales.

Quarterly Cash Distribution

Last month, Energy Transfer announced third quarter distribution of 89.375 cents per unit ($3.575 per unit annualized), unchanged from the year-earlier as well as previous quarter distributions. The distribution will be paid on November 14, to unitholders of record as of November 6, 2012.

EBITDA & Operating Income

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter was $481.7 million compared with $404.2 million in the year-ago quarter, reflecting robust performance from the Interstate Transportation business unit.

Operating income of $291.9 million was up 6.6% from the third quarter of 2011.

Distributable Cash Flow

Energy Transfer Partners reported distributable cash flow of $339.5 million in the quarter, up from $266.1 million in the prior-year quarter.

Capital Expenditure

During the quarter, maintenance capital expenditure totaled $27.0 million, down 14.1% year over year.

Balance Sheet

As of September 30, 2012, Energy Transfer had long-term debt (less current maturities) of $8,690.7 million. Debt-to-capitalization ratio was 52.7%.

Our Recommendation

We believe Energy Transfer Partners is well positioned to compete in the natural gas midstream and transportation & storage businesses with its geographically-dispersed asset mix. The partnership has a significant market presence in each of its operating areas, which are located in major natural gas-producing regions of the U.S.

Earlier in October, Energy Transfer Partners merged with Sunoco Inc. for $5.3 billion. The partnership will have the ownership of Sunoco’s branded retail business, general partner interest, plus a 32.4% stake and incentives distribution rights in Sunoco Logistics Partners L.P. (SXL - Analyst Report), a master limited partnership in which Sunoco had 34% stake.

With this acquisition, Energy Transfer Partners aims to penetrate further in the crude oil transportation business as natural gas supplies remain under pressure from decade-low prices.

Energy Transfer Partners currently retains a Zacks #2 Rank (short-term Buy rating).


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