Better late than never
The much-anticipated merger in the midstream energy space was finally announced late on August 1. Energy Transfer Partners (ETP) has agreed to merge with the wholly owned subsidiary of Energy Transfer Equity (ETE) in an all-stock deal. ETE’s IDRs (incentive distribution rights) in ETP will be canceled after the transaction is completed.
In its first-quarter earnings call, Energy Transfer Equity told investors that it has been exploring options to simplify its ownership structure. That’s due to the high cost of equity capital for Energy Transfer Partners from the IDRs present in its capital structure and the possible impact of the revised FERC (Federal Energy Regulatory Commission) policy.
The simplification option also included a C corporation GP (general partner). However, the recent announcement of the final policy rule eliminating the need to account for accumulated deferred income tax in the rate base may have eliminated the C-corporation option.
Energy Transfer Equity supported Energy Transfer Partners’ growth plans by offering incremental IDR subsidies for eight quarters ending December 31, 2017. The elimination of IDR subsidies has put pressure on the limited partnership’s distribution coverage in the first quarter of 2018. Its high leverage, massive capital spending plans, and project delays increased the need for simplification.
According to a related press release, “The transaction is expected to strengthen the balance sheet of the combined organization by utilizing cash distribution savings to reduce debt and to fund a portion of ETP’s robust growth capital expenditure program.”
Energy Transfer Partners has joined the league of other major midstream companies that have simplified their ownership structures to lower the cost of equity capital. They include Kinder Morgan (KMI), Williams Companies (WMB), and Oneok (OKE).
Stock price reaction
Energy Transfer Partners opened with gains of ~9% in pre-market trading today. That comes after a strong 11% rally over the past month. ETP has risen 18.4% year-to-date before the merger announcement. The Alerian MLP ETF (AMLP) and the Energy Select Sector SPDR ETF (XLE) have risen 1.1% and 5.2%, respectively.