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. (NYSE:ETP):
- The $1.35 billion acquisition of LDH Energy and the formation of the Lone Star joint venture with Regency Energy Partners (NYSE:RGP) announced March 2011;
- The sale of the retail propane business to AmeriGas Partners, L.P. (NYSE: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 (NYSE:SUG) by Energy Transfer Equity, L.P. (NYSE:ETE), ETP's general partner, announced March 2012; and
- The $5.3B acquisition of Sunoco, Inc. (NYSE: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:
Cash flow impact per annum
Notes & assumptions
$5.3B Sunoco acquisition:
Cash from units issued 11/11
Cash from refinery divestitures
ETP conf. call
Debt to be issued
6% cost of debt
Units to be issued
$965m SUN net debt assumed
Net of cash, at 6%
SUN retail EBITDA
ETP data, 2011
SUN retail maintenance cap ex
SUN data, 2011
ETP conf. call
SXL distributions (pretax)
ETE's IDR relinquishment
$210m over 4 yrs)
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.