How Energy Transfer Equity is affected
Energy Transfer Equity, which is dependent on distribution income from its subsidiaries, stands to lose if Williams Partners decides to cut its distributions. Following the merger, ETE is expected to receive cash flows from the following LP (limited partner), GP (general partner), and IDR (incentive distribution rights) interests in its subsidiaries:
- Energy Transfer Partners (ETP): ~1% LP interest, 100% GP interest, and IDRs
- Sunoco Logistics Partners (SXL): 90% of GP and IDR through ownership of class H units in Energy Transfer Partners (ETP)
- Sunoco LP (SUN): 100% GP and IDRs
- 100% interest in Energy Transfer LNG
- Williams Partners: ~58% LP interest, 100% GP interest, and IDRs
Cost of capital Increase
The downgrade is expected to increase WPZ’s and WMB’s cost of debt. Their cost of equity is already higher due to rising distribution yields. WMB and WPZ are currently trading at high distribution yields of 12.4% and 14.3%, respectively. This should result in a higher cost of capital. Some projects might be delayed or become unattractive at higher costs of capital. This could affect WPZ’s long-term distributable cash flow growth and thus ETE’s earnings.
Currently, ~50% of analysts rate Williams Companies a “buy,” ~40.0% rate it a “hold,” and ~11.0% rate it a “sell.” At the same time, Williams Partners has a “buy” rating from 53.8% of analysts, while 46.2% of analysts rate it a “hold.” However, 85.7% of analysts rate ETE a “buy.” We’ll have to wait to see if this downgrade affects analysts’ ratings of ETE. WPZ alone constitutes ~4.7% of the Global X MLP ETF (MLPA).