In an article titled "A Closer Look at Energy Transfer Partners' 2011 Distributable Cash Flow" published February 25, 2012, I reviewed some of the significant developments occurring at Energy Transfer Partners, L.P. (ETP):
- Entering the natural gas liquids ("NGL") business through the $1.35 billion acquisition of LDH Energy and the formation of the Lone Star joint venture with Regency Energy Partners (RGP);
- Selling the propane business to AmeriGas Partners, L.P. (APU) for $1.46 billion;
- Acquiring for $2 billion 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; and
- Announcing more than $3.0 billion of organic growth opportunities with a focus on liquids rich opportunities in the Eagle Ford, Permian, and Woodford areas.
Since then, capping 15 transformative months, ETP announced the $5.3 billion acquisition of Sunoco, Inc. (SUN) in order to become a transporter of heavier hydrocarbons like crude oil, NGLs, and refined products.
No doubt, there are strategic benefits to exiting the propane business, entering the NGL business, expanding ETP's natural gas transmission business in Florida and potentially in the Midwest, and diversifying into crude transportation. However, the short-term cash flow implications also deserve a closer look. Using EBITDA less interest expense less maintenance capital expenditures as a proxy for the impact on Distributable Cash Flow ("DCF") per year for the next 3-4 years, my back of the envelope analysis is as follows:
|Cash flow impactper annum||Notes & assumptions|
|$1.35B LDH acquisition (Lone Star JV with RGP), Mar 2011:|
|Units issued 4/11||695||(100)||7.5% =14.4% including IDRs|
|Debt||655||(39)||6% cost of debt|
|LDH EBITDA||144||ETP data + my assumption|
|Maintenance cap exp||(40)||ETP data + my assumption|
|$1.46B sale of retail propane business to APU, Oct 2011:|
|Repayment-ETP revolver 1/9/12||(597)||36||6% cost of debt|
|Tender for ETP notes 1/9/12||(863)||60||ETP data|
|$100m debt assumed by APU||6||6% cost of debt|
|EBITDA forgone||(222)||ETP data|
|Maintenance cap exp saved||27||ETP data|
|Distributions from APU units||90||ETP data|
|$2B acquisition of SUG's 50% interest in Citrus, completed Mar 2012:|
|Units issued||105||(15)||7.5% =14.4% including IDRs|
|Debt issued||1,895||(114)||6% cost of debt|
|$1.413B Citrus debt assumed||(85)||6% cost of debt|
|50% of Citrus EBITDA||266||ETP data|
|Maintenance cap exp||(80)||Analyst report|
|ETE'sIDR relinquishment||55||$220m over 4 yrs|
|$5.3B acquisition of Sunoco, announced Apr 2012:|
|Cash from units issued 11/11||560|
|Cash from refinery divestitures||250||ETP conference call|
|Debt to be issued||1,840||(110)||6% cost of debt|
|Units to be issued||2,650||(382)||As above|
|$965m SUN net debt assumed||(58)||Net of cash, at 6%|
|SUN retail EBITDA||261||ETP data, 2011|
|SUN retail maintenance cap ex||(70)||SUN data, 2011|
|Operational synergies||70||ETP conference call|
|SXL distributions (pretax)||97||ETP data|
|ETE'sIDR relinquishment||70||$210m over 4 yrs)|
Table 1: Figures in $ Millions
The first thing that strikes me about Table 1 is that while transactions preceding the SUN acquisition seem to be either mildly accretive or mildly dilutive to DCF over the next ~3 years, my numbers do not indicate that is the case with respect to SUN. This is in contrast to the ETP press release dated April 30, 2012, that stated the SUN acquisition is expected to be immediately accretive to ETP's DCF. Granted, my numbers are very rough estimates but the discrepancy is glaring. The dilutive effect would be even greater were I to take into consideration the ~15% cost of capital on the $560 million of units issued late last year (proceeds of which I assume help finance this transaction) and the fact that SUN is a tax paying entity so that there will be some cash outflow as a result of taxes due on the retail operation. An explanation of how the SUN transaction becomes accretive would be most welcome.
Other points highlighted by Table 1 are the high cost of capital faced by ETP given that ETE's receives 48% of all ETP's incremental DCF, the large number of ETP units to be issued (~55 million based on recent trading levels, which could exert downward pressure on price), and that, at least in the short term, these transactions will not generate a resumption of ETP's distribution growth. If there is growth in distributions, I think it would come from other sources:
- Fayetteville Express Pipeline: a 50/50 joint venture with Kinder Morgan Energy Partners, L.P., (KMP) with the capacity to transport up to 2.0 billion cubic feet of natural gas per day serving the Fayetteville Shale producing region in Arkansas. My back-of-the-envelope assumptions are 6x cash flow multiple on this $1 billion project and 40% throughput increase in 2012 based on contractual demand, so the net increase in DCF will be ~$33 million (before taking into consideration ETE's incentive distributions) and ~$17 million to limited partners.
- Tiger Pipeline: this is a 42-inch interstate natural gas pipeline with the capacity to transport 2.4 billion cubic feet per day that serves the Haynesville Shale and Bossier Sands producing regions in Louisiana and East Texas. My back-of-the-envelope assumption are 6x cash flow multiple on this $1 billion project and 40% throughput increase in 2012 based on contractual demand, so the net increase in DCF will be ~$66 million (before taking into consideration ETE's incentive distributions) and ~$34 million to limited partners.
- Other SUG dropdowns: ETE has granted ETP a right of first offer with respect to any disposition by ETE of SUG of Southern Union Gas Services, a subsidiary of SUG which owns and operates a natural gas gathering and processing system serving the Permian Basin in west Texas and New Mexico.
- Other, smaller, projects expected for the first time to impact full year results in 2012: these include the initial phase of REM (a 160-mile, 30-inch pipeline completed in October 2011) and the 120 million cubic feet per day Chisholm plant, both servicing the Eagle Ford Shale in south Texas and totaling ~$300 million; the 8-inch, 43 mile, $30 million Freedom Pipeline; and the 12-inch, 93 mile, $26 million (ETP share) Liberty Pipeline.
However, until I have a better understanding of the how the SUN transaction is accretive, I will not hazard predicting a distribution increase. ETP's own prediction, made during the conference call discussing 1Q11 results ("we expect to grow the rate by no later than the third quarter of this year"), did not turn out to be accurate.