Energy Transfer Partners Restructures to Avoid Junk Rating

Steve Russell

Sunoco Logistics Partners (SXL) has agreed to acquire Energy Transfer Partners (ETP, builders of the Dakota Access Pipeline) in an exchange of units, 1.5 units of SXL for each unit of ETP. The announced deal is supposed to close before the end of the first quarter of 2017. The combined entity will keep the ETP name but SXL executives will run it.

This was a shotgun wedding blessed by the general partner of both SXL and ETP, Energy Transfer Equity (ETE), to avoid a downgrade of ETP’s debt. In a report published on the investment blog, Seeking Alpha, Bruder Capital explained:

From ETE's perspective, the ETP and SXL partnerships are its main vehicles for raising funds to pay for expansion of the group's business (geographically and operationally). Should either entity drop into junk status, its debt funding costs increase.

ETP has not been generating enough cash to pay the distributions unitholders expect, and the general partner has foregone Incentive Distributions Rights (IDRs) to the tune of $35 million and it has agreed to give away another $720 million. “Unitholders” are shareholders in master limited partnerships and “distributions” are like dividends on regular stock.

The MLP “units” trade on stock markets and the unitholders are usually more interested in reliable income than capital gains. Failure to pay the distributions would cause ETP units to tank, and plummeting value of ETP on the market would not impress the rating firms.

Already, Moody’s put ETP’s investment grade rating on “Watch Negative” back in June. Standard & Poor’s did the same after the restructuring was announced. ETP and SXL, about to merge, are two of four master limited partnerships owned by parent company Energy Transfer.

Energy Transfer’s website displays a map of pipelines owned by all four of their MLPs. The Black Snake shows on the map in purple.

Matthew DiLallo, who writes about ETP for another investment site, The Motley Fool, considers Standing Rock’s objections to the Black Snake to be frivolous and has said as much. Those objections are still dangerous to ETP because of ETP’s money issues. Upon hearing of the Army’s decision to halt the project and do a real environmental impact statement, DiLallo wrote:

That is the last thing Energy Transfer and Sunoco need right now. Not only are the companies in the process of merging, but they are working to close the sale of a minority stake in the project for some much-needed cash to bolster their financial situation, which has been under pressure from the oil market downturn and these delays. That's why they hope the courts or the new administration will step in and save them from having to invest additional time and money in this project.

RELATED: Army Denies Dakota Access Easement Under Lake Oahe; Exultation Ensues

ETP’s money problems are on a level far removed from the kinds of actions ordinary people can take against corporations. Ordinary people can’t boycott ETP but Phillips 66 is also involved in the DAPL project and Sunoco also sells gasoline on the retail level. ETP also owns Stripes gas stations and convenience stores. So far, the Water Protectors have not organized consumer boycotts at the retail end.

Even with no action against gas stations associated with the Black Snake, ETP is having cash flow problems. Time is money for Energy Transfer Partners and they are strapped for cash. The Water Protectors have cost ETP both time and money.

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bullbear's picture
Submitted by bullbear on
Perhaps one of the kickers here is that Trump is also an investor of ETP. Although he has liquidated most of his nearly $1 million worth of stock in ETP, he still is holding under $50,000 (The Washington Post 12/6/16). For Trump to put his hand on the inner workings and publicly push for the pipeline, the incoming U.S. President is then creating a clear conflict of interest in the scope of personal financial dealings. My sense is the Bernie Sanders of the world will draw enormous attention to that and set back the Black Snake even further. Let us hope that the financial backers, including banking financial institutions, are squirming to a degree that they will start pulling the plug from their end.