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Analyzing Cash Flows of Master Limited Partnerships

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2014-07-25 16:00

ETP: Update regarding Energy Transfer Partners' Sunoco acquisition

Author: Ron Hiram

Published: July 2, 2012

In an article published May 3, 2012, titled “A Closer Look at Cash Implications of Energy Transfer Partners’ Transformative Transactions” I analyzed the cash flow impact of significant transactions announced by Energy Transfer Partners, L.P. (ETP):

  • the $1.35 billion acquisition of LDH Energy and the formation of the Lone Star joint venture with Regency Energy Partners (RGP) announced March 2011;
  • the sale of the retail propane business to AmeriGas Partners, L.P. (APU) for $1.46 billion announced October 2011;
  • the $2 billion acquisition of a 50% interest in Citrus, which owns 100% of the Florida Gas Transmission pipeline system, following the closing of the acquisition of Southern Union Gas (SUG) by Energy Transfer Equity, L.P. (ETE), ETP’s general partner, announced March 2012; and
  • the $5.3B acquisition of Sunoco, Inc. (SUN) announced April 2012.

For ease of reference, I excerpt from the table included in that article the portion dealing with the Sunoco acquisition, since it is that transaction that I found most difficult to understand and was most concerned about:

 
Transaction Financing
Cash flow impact per annum
Notes & assumptions
$5.3B Sunoco acquisition
Cash from units issued 11/11560
Cash from refinery divestitures250ETP conference call
Debt to be issued1,840-1106% cost of debt
Units to be issued2,650-382ETP presentation (50% units)
$965m SUN net debt assumed-58Net of cash, at 6%
SUN retail EBITDA261ETP data, 2011
SUN retail maintenance cap ex-70SUN data, 2011
Operational synergies70ETP conference call
SXL distributions (pretax)97ETP data
ETE’s IDR relinquishment70$210m over 4 yrs)
5,300-123

 

Table 1: Figures in $ Millions

The businesses being acquired by ETP include SUN’s aging and money-losing Pennsylvania refinery. SUN planned to exit this business and ETP’s management estimated refinery divestitures would generate $250 million cash inflow. This figure was provided at an analyst conference call following announcement of the SUN transaction and is included in Table 1. However, on July 2, 2012, The Wall Street Journal reported there will be no upfront payment. Instead, ETP (via Sunoco) will retain a one-third ownership stake and over the long term stands to benefit if CGs plan to turn around the refinery operation (which had reportedly been losing $1 million per day) by investing at least $200 million to upgrade the facility and creating the infrastructure required to deliver as much as 140,000 barrels of crude a day from North Dakota’s Bakken Shale fields to the refinery.

While a $250 million shortfall may not seem significant in the context of a $5.3 billion transaction, I am concerned. This is the second instance where, over a relatively short time period, management’s projections did not turn out to be accurate (the first instance was the prediction that distribution growth will resume no later than the third quarter of 2011). ETP will continue to have a stake in the refinery, a non-core business it wished to divest, and will have to fund the shortfall with additional debt or equity. Also, based on the numbers in Table 1, do not see how ETP can state that the SUN acquisition will be immediately accretive to ETP’s distributable cash flow (“DCF”). Granted, my numbers are very rough estimates but the discrepancy is glaring. An explanation of how the SUN transaction becomes accretive would be most welcome.

On June 28, 2012, ETP issued 13 million units (the total may be increased by 2.025 million units if the overallotment option is exercised) at $44.57. At the current price of $44.40, ETP will, by my calculation, need to issue another ~60 million units (up from ~55 million as of my May 3rd article) when the Sunoco transaction closes. The number of units outstanding will therefore increase by 75 million (~33%) vs. the number outstanding as of 3/31/12.  At the current $3.575 per unit per annum distribution rate, ETP will be required to distribute an additional $268 million per annum. In order to do so, DCF will have to increase by over $500 million given that ETE (ETP’s general partner) receives 48% of all ETP’s incremental DCF. I don’t see how this can be done.

In light of the above, the low distribution coverage ratio and the deterioration in ETP’s 1Q 2012 results (see article dated May 14), I am further reducing my position.

4 comments to ETP: Update regarding Energy Transfer Partners’ Sunoco acquisition

  • I have also lightened up considerably on ETP due to lack of dividend growth over the past several years. However, I used these funds to increase my investment in their GP ETE to achieve distribution growth.

    Now ETP has announced their intention to purchase ETE… What’s your take on this? Do you feel that the reduced credit risk will set the stage for finally increasing distribution growth?

    Thank you for your help on this highly complex MLP Sector.

    Jerry Chessler

    • Ron Hiram Ron Hiram

      Kelcy Warren has mentioned the need to “simplify the story” (which has indeed become overly complex) and a such a purchase may be in the works, but there has not yet been an announcement of ETP purchasing ETE. There was a June 18 announcement to the effect that, concurrent with ETP’s closing of its acquisition of SUN, ETE will drop SUG into ETP Holdco which wil be owned 60% by ETE and 40% by ETP. Holdco will be controled by ETP through Board seats and voting rights. Prior to the contribution of SUN to Holdco, SUN will contribute its interests in SXL in which it holds a 32.4% limited partnership interest, the 2% general partnership interest and 100% of its IDRs, to ETP.
      I am concerned that the SUN acquisition will set back the prospects for resumption of distribution growth at ETP.

  • Adam Fein

    Have you taken a look at KED as an alternative to MLP’s?

    Thanks for the brilliant work

    • Ron Hiram Ron Hiram

      Yes, but I think the disadvantages in terms of fess and more limited liquidity outweigh the benefits, especially for a closed end fund that invests in an area I follow closely and do a lot of homewrok on.

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