The structure and series of transactions undertaken with respect to ETP Holdco Corp. ("Holdco"), the entity formed by ETP and its general partner, Energy Transfer Equity, L.P. (NYSE:ETE), are complicated, and I did not catch an error with respect to an acquisition's purchase price prior to submitting my prior article on this topic for publication. In addition to bringing up the issue that management has not explained the price being paid by ETP for 60% of Holdco, my intent was to elicit help from readers who can shed light on the appropriateness of the price. Based on reader comments, the prior article may have come across as too judgmental. For that and for the errors made, I apologize.
My revised analysis is set forth below. I would welcome corrections provided by readers.
Energy Transfer Partners L.P. (NYSE:ETP) paid $5.3 billion for Sunoco Inc. Sunoco's interests in Sunoco Logistics Partners L.P. ("SXL") plus $2 billion in cash were carved out and retained by ETP and were thus not transferred to Holdco. However, in place of the carved-out assets, ETP contributed 90,706,000 of its Class F units to Holdco. The Class F Units are entitled to 35% of the quarterly cash distribution generated by ETP and its subsidiaries other than Holdco, subject to a maximum cash distribution of $3.75 per Class F unit. Once ETP assumes full ownership of Holdco, it will own its own Class F units and can effectively cancel them. At the end of the day, ETP will have paid $5.3 billion for Sunoco, and after it assumes full ownership of Holdco, will end up with 100% of the Sunoco assets (or the benefits from them). Therefore, I see no related-party transfer price issue with respect to Sunoco.
ETE paid $5.4 billion for SUG. It sold a portion of the SUG assets (the Citrus dropdown) to ETP for $2 billion and will be paid a further $3.75 billion by ETP for the remainder of the assets once ETP assumes full ownership of Holdco. ETP, for its part, will have paid $5.75 billion for SUG, a small total consideration delta when compared to the. $5.4 billion paid by ETE.
As far as I can tell, Holdco retains the benefit of all SUG asset dispositions, including for example, the economic value of the Philadelphia refinery business that was contributed out of SUG into a joint venture with the Carlyle Group, the sale of SUG assets to Laclede Group for $1.035 billion, and the SUG assets sold to Regency Energy Partners L.P. (NYSE:RGP). Therefore, the benefit of these transactions will accrue to ETP and do not impact the total consideration delta.
At ETP's current distribution rate of $0.89375 per quarter, I calculate ETE's IDR to be $0.52 per unit. The number of ETP units to be issued is ~48 million ($2.35 billion at an assumed price of ~$49 per unit). The value of the IDRs forgone by ETE is roughly $25 million per quarter. ETE is waiving 12 full quarters (8 at 100% and 8 at 50%). Ignoring time value of money, this amounts to ~$300 million, a figure that can explain the total consideration delta.
I hope, but am not certain, that I understand the price being paid by ETP. It would be helpful to see an explanation forthcoming from management. My conclusion remains -- a preference for ETE over ETP.
Disclosure: I am long ETP, ETE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.