Recently, I published an article discussing Energy Transfer Partners (ETP), one of the largest pipeline partnership companies. You can read the article here. The general partnership units and incentive distribution rights of Energy Transfer Partners are owned by another limited partnership company, Energy Transfer Equity (ETE). In its recent history, Energy Transfer Equity has provided the distribution growth which Energy Transfer Partners has failed to deliver.
For those investors reading this who are not familiar with the general partner and incentive distribution rights - IDR - of master limited partnership - MLP - companies, the rights associated with the IDRs are very valuable. The general partnership units are worth 1% to 2% of the outstanding value of all partnership units but control the business. Limited partnership units have no voting right. Incentive distribution rights are clauses in the partnership agreement which result in larger payments to the general partnership once the distributions to limited partners reach a certain level. As the distribution levels increase, the IDR percentage typically ramps up to 50% of any increase in distributions paid to the limited partner units. As a result, when quarterly distributions are increased to the limited partnership investors, the money paid to the general partner through the IDRs increase at a faster rate.
Energy Transfer Equity owns the general partnership, IDRs and 50 million - 22% - of the L.P. units of Energy Transfer Partners. Energy Transfer Equity also owns the general partner units and IDRs of Regency Energy Partners L.P. (RGP) plus 26 million or 17% of the RGP limited partnership units. Until the recent purchase of Southern Union company, these MLP ownership assets generated the revenue and earnings of Energy Transfer Equity.
In June 2011, Southern Union Company - an interstate natural gas pipeline company - agreed to be acquired by Energy Transfer Equity for $7.9 billion. The Williams Companies (WMB) made a competitive offer to buy Southern Union and Energy Transfer Partners ended up purchasing the company for an upgraded bid of $9.4 billion. The Southern Union merger was completed near the end of March 2012. Energy Transfer Equity has dropped some acquired pipeline assets down into Energy Transfer Partners, but a signficant portion of the Southern Union business is now a part of Energy Transfer Equity.
As a MLP itself, Energy Transfer Equity also pays attractive distributions to L.P. unit holders and the shares currently yield 6.6%. The Energy Transfer Partners units yield 8.2%. The difference is due to the distribution growth rates. The Energy Transfer Partners quarterly per unit distribution has not changed since the beginning of 2009 - 16 consecutive quarters at the same payout. Over the same time period, the Energy Transfer Equity has increased from a quarterly rate of 44 cents per unit up to 62.5 cents paid for the second quarter of 2011 and through the next four quarters. That is a 42% increase in the amount of distribution over 3 years. Energy Transfer Equity usually announces the second quarter distribution rates for both ETE and ETP in late July. If the company follows recent trends, the ETE distribution should show an increase from the rate paid for the last year.