Pipeline giant Energy Transfer Partners (NYSE: ETP) recently reported its best quarter in years. Earnings and cash flow soared, enabling the company to comfortably cover its 12.4%-yielding distribution even after factoring out the extra support received from its parent, Energy Transfer Equity (NYSE: ETE). In addition to that, its CFO noted several vital steps the company took toward improving its financial situation on the accompanying conference call. That said, as important as those remarks were, the master limited partnership‘s (MLP) CEO said something even more fascinating during the question and answer part of that call that could have significant future implications.
We’d love to accelerate, but there’s just one catch
On the call, an analyst noted that there had been discussions previously about a potential transaction between Energy Transfer Partners and Energy Transfer Equity that would eliminate the costly management fees. Driving that recurring question is the fact that several rivals have completed similar transactions over the past few years. For example, in 2016, Targa Resources (NYSE: TRGP) acquired its MLP in a deal that eliminated the costly management fees and simplified its structure. Last year, meanwhile, Williams Companies (NYSE: WMB) eliminated the management fees of its MLP in exchange for more units in a transaction that simplified its structure and enhanced its credit profile. Finally, earlier this year, MLP NuStar Energy (NYSE: NS) agreed to acquire its parent in a deal that will result in the cancellation of the management fees.
The analyst noted that on previous calls, Energy Transfer “talked about doing [a similar transaction] in 2019.” However, given the company’s recent progress in shoring up its financial situation, the analyst asked, “could this be potentially accelerated?”
Co-founder and CEO Kelcy Warren took this one, saying:
Yeah … absolutely. If we’re allowed to accelerate a consolidation of ETE and ETP, we will do that. It’s just fundamentally simple as in … We just can’t risk any kind of negative view by rating agencies, and until we get our financial health improved … we will not be doing any kind of consolidation. But as soon as we can, we will.
In other words, as much as Energy Transfer would love to follow its peers in completing a simplification transaction, it can’t right now because doing so might result in a credit rating downgrade to a non-investment grade level. The company can’t risk that since it would increase its borrowing costs at a time when it needs access to cheap debt to finance its massive slate of expansion projects.
We’re intrigued by this idea
In addition to that question on timing, the same analyst noted that the nation’s largest natural gas driller, EQT Corp (NYSE: EQT), recently announced some interesting news relating to its midstream assets. The analyst pointed out that EQT said it would “spin off their midstream into a C-Corp with the MLPs remaining below at least for now.” In other words, EQT will take the units it currently holds in MLPs EQT Midstream (NYSE: EQM) and EQT GP Holdings (NYSE: EQGP) and put them into a new C-Corp that it will spin off to investors. However, the rest of the units in those two MLPs would remain publicly traded. Given that recent development, the analyst wanted to know if “that’s a structure that perhaps you might examine in the future?”
CEO Kelcy Warren addressed this one as well:
Yeah … on the structure — I’ll comment generally, because I’m not as up to speed on the EQT structure as I need to be, but I will be this afternoon. We are interested in a C-Corp structure. As you know we almost did one with the Williams transaction. We have many quality assets that are already in a corporate structure and they’re quality assets. So, we’re exploring having a publicly traded C-Corp in the family of Energy Transfer that will allow us to better access the capital markets and hopefully there’ll be more to follow on that.
I think it’s fascinating that the company is interested in adding a C-Corp structure to its family. While it failed in its first attempt when the Williams deal fell through, several of its rivals have chosen that structure to drive growth. For example, Targa Resources combined its entire franchise into a C-Corp, while Williams decided to continue using both a C-Corp and an MLP. Meanwhile, in EQT’s case, it sees the C-Corp structure providing it with improved capital market access and flexibility in pursuing mergers and acquisitions since it can make deals using the stock of its C-Corp or units of its MLP EQT Midstream depending on the entity it’s looking to acquire. The intriguing potential to add another currency could increase Energy Transfer’s flexibility and potentially bolster its long-term growth prospects and financial profile.
This one is going to require a healthy dose of patience
Energy Transfer Partners’ CEO made it clear on the call that his company plans to address its complex corporate structure in the next two years, which could include the interesting idea of rolling out a new C-Corp. That said, the credit rating agencies have tied the company’s hands for now, which means investors need to be patient while it continues shoring up its financial situation. However, at the right time, the company expects to announce a transaction that should help unlock the value of its assets, which could drive its valuation higher and pull its yield out of the double-digits.
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