Energy Transfer Partners: These 7.375% Fixed-To-Floating Units Started Trading On The NYSE

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About: Energy Transfer LP (ET)
by: Arbitrage Trader
Summary

Overview of Energy Transfer Partners' new preferred units, ETP-C.

Comparison with the sector.

Where in the context of all fixed-to-floating securities is ETP-C?

Schedule K-1.

In this article, we want to shed light on a new Preferred Units issued by Energy Transfer Partners (ETP). Our main goal is purely to inform you about the product while refraining from an investment recommendation. Even though the product might not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the prospectus. For a total of 18M units issued, the total gross proceeds to the company are $450M. You can find some relevant information about the new preferred units in the table below:

Source: Author's spreadsheet

Energy Transfer Partners 7.375% Series C Fixed-to-Floating Cumulative Redeemable Perpetual Preferred Units (NYSE: ETP-C) pays a fixed dividend at a rate of 7.375% before 05/15/2023 and then switches to a floating dividend at a rate of the Three-month LIBOR plus 4.53%. The new preferred units carry a 'BB' S&P rating and are callable as of 12/15/2023. Currently, the new issue trades at a price of $24.88 and have a current yield of 7.41% and yield-to-call of 7.49%. The dividends paid by this preferred stock are not eligible for the preferential 15-20% tax rate on dividends. They are also not eligible for the dividend received deduction for corporate holders. This means that the "qualified equivalent" current yield and YTC would be 6.18% and 6.24%, respectively.

Here is how the stock's YTC curve looks like right now:
Source: Author's spreadsheet

The Company

As per the company's website:

On April 28, 2017, Energy Transfer Partners and Sunoco Logistics Partners (NYSE:SXL) closed on their previously announced merger, in which SXL acquired ETP. Upon closing of the merger, SXL changed its name to Energy Transfer Partners, L.P. and applied to list its common units on the NYSE under the ticker symbol "ETP." Effective with the opening of market on April 28, 2017, ETP ceased to be a publicly traded company and its common units previously listed on the NYSE under the ticker symbol "ETP" have been de-listed. Effective with the opening of market on May 1, 2017, SXL common units are expected to begin trading on the NYSE under the new symbol "ETP." This change is now reflected in the ETP stock price.

Energy Transfer Partners, L.P. is a master limited partnership that owns and operates one of the largest and most diversified portfolios of energy assets in the United States. Strategically positioned in all of the major U.S. production basins, ETP owns and operates a geographically diverse portfolio of complementary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, natural gas liquids and refined product transportation and terminalling assets; NGL fractionation; and various acquisition and marketing assets. ETP's general partner is owned by Energy Transfer Equity, L.P. (NYSE: ETE).

Energy Transfer Equity, L.P. (NYSE:ETE) is a master limited partnership that owns the general partner and 100% of the incentive distribution rights (IDRs) of Energy Transfer Partners, L.P. and Sunoco LP (NYSE: SUN). ETE also owns Lake Charles LNG Company. On a consolidated basis, ETE's family of companies owns and operates a diverse portfolio of natural gas, natural gas liquids, refined products, and crude oil pipelines, as well as retail and wholesale motor fuel operations and LNG terminalling.

Below, you can see a price chart of the common stock, ETP:

Source: Tradingview.com

For 2017, the company paid a $1.85 annual dividend on its common stock. With a market price $18.20, the current yield of ETP is 10.10%. As an absolute value, this means it has in $2.15B yearly dividend expenses for the common. For comparison, the yearly dividend for the newly issued preferred units of the company is around $129M. In addition, with a market capitalization of around $21.4B, ETP is one of the biggest company's in the Oil & Gas Pipelines sector (according to Finviz.com).

Capital Structure

Source: Morningstar.com

As of December 2017, Energy Transfer Partners had a total debt of $33B ranking senior to the newly issued preferred units. The new Series C preferred units rank junior to all outstanding debt and equal with the other preferred units of the company.

The Energy Transfer Partners Corporate Bonds

There are many Corporate Bonds, issued from ETP:

Source: FINRA

The 2023 Corporate Bond has the closest maturity date as the call date of ETP-C and has a yield-to-maturity of 4.234%. This should be compared to the 7.49% yield-to-call of ETP-C, but when making that comparison, do remember that ETP-C's YTC is the maximum you could realize if you hold the preferred stock until 2023. Still, a yield margin over 3% between the two securities seems to be a little too high, especially when the common stock pays a dividend of over $2B compared to $33M for the newly issued units.

Some more information about the bond could be found in the table below:

Source: FINRA

Sector Comparison

The chart below contains all preferred units in the Oil & Gas Pipelines sector (according to Finviz.com) that pay a fixed-to-floating dividend rate.

By Years-to-Call and Yield-to-Call

Source: Author's database

By Yield-to-Call and Current Yield

Source: Author's database

Here is the full list:

Source: Author's database

Fixed-to-Floating Preferred Units

These 3 charts contain all fixed-to-floating preferred units with non-suspended distribution, by their years-to-call and yield-to-call, and by their yield-to-call and current yield. This means that the LGCY preferred stocks are excluded from this chart as they don't pay dividends.

By Years-to-Call and Yield-to-Call

Source: Author's database

By Yield-to-Call and Current Yield

Source: Author's database

Here is the full list:

Source: Author's database

All Fixed-to-Floatings

The next 2 charts present all fixed-to-floating securities with non-suspended distribution, that pay a fixed-to-floating dividend rate, with a positive YTC.

By Years-to-Call and Yield-to-Call

Source: Author's database

By Yield-to-Call and Current Yield

Source: Author's database

All Preferred Stock Units

The chart below contains all preferred stocks units with Schedule K-1 with non-suspended distribution, by their yield-to-call and current Yield. Again, LGCY preferred stocks are excluded from this chart.

Source: Author's database

Furthermore, for a better idea, SPLP-A is also excluded from this chart, as its yield-to-call is 330%.

Schedule K-1

As per the 424B5 filing by Energy Transfer Partners:

We intend to furnish to each unitholder, within 90 days after the close of each calendar year, specific tax information, including a Schedule K-1, which describes his share of our income, gain, loss and deduction for our preceding taxable year. Notwithstanding the rules described above under "-Tax Consequences of Unit Ownership-Basis of Units" requiring aggregation of partnership interests purchased in separate transactions, you may receive two Schedules K-1 if you hold common units and Series C Preferred Units due to administrative reporting limitations. In preparing this information, which will not be reviewed by counsel, we will take various accounting and reporting positions, some of which have been mentioned earlier, to determine each unitholder's share of income, gain, loss and deduction. We cannot assure you that those positions will yield a result that conforms to the requirements of the Internal Revenue Code, Treasury Regulations or administrative interpretations of the IRS. Neither we nor Latham & Watkins LLP can assure prospective holders of Series C Preferred Units that the IRS will not successfully contend in court that those positions are impermissible. Any challenge by the IRS could negatively affect the value of the Series C Preferred Units.

Use of Proceeds

As per the 424B5 filing by Energy Transfer Partners:

We intend to use the net proceeds from this offering, including the net proceeds from any exercise of the underwriters' option to purchase additional Series C Preferred Units, to repay amounts outstanding under our revolving credit facility and for general partnership purposes.

Addition to the S&P Preferred Stock Index

With the current market capitalization of the new issue of $450M, it is a potential addition to the S&P U.S. Preferred Stock iShares Index (NASDAQ:PFF). If the average monthly volume of ETP-C after its first six months trading on the NYSE is more than 250,000, it would be eligible to be included in the S&P U.S. Preferred Stock Index. With fewer than six months of trading history, issues are evaluated over the available period and may be included if available trading history infers the issue will satisfy this requirement.

Conclusion

This is an informational article about the new preferred units ETP-C. With this kind of article, we want to keep you in touch with all new preferred stock and baby bonds IPOs.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.