Energy Tangle: Making Sense of the ETP Holdco Buyout

Earlier this week Energy Transfer Partners (NYSE: ETP  ) announced it was buying Energy Transfer Equity's (NYSE: ETE  ) stake in ETP Holdco for $3.75 billion. ETE is the general partner to the master limited partnership ETP. That relationship, together with the similar names of all of these entities, can complicate one's understanding of what exactly this acquisition means. With that in mind, today we're going beyond the press release and breaking down this deal. For the sake of clarity, the Energy Transfer entities will be referred to by their respective ticker symbols.

Holdco refresher
ETP and ETE formed Holdco in October 2012 to jointly own the equity interests in Southern Union Company and Sunoco. ETE closed on the Southern Union merger in March of last year, while ETP closed on the Sunoco one in October. At the time of creation, ETE had a 60% stake and ETP had a 40% stake, though the majority board membership belonged to ETP.

Southern Union's assets are primarily natural gas pipeline systems. Its 15,000 miles include the Panhandle Eastern Pipeline Company, the Trunkline Gas Company, the Sea Robin Pipeline Company, Trunkline LNG Company, Southwest Gas Storage, and an operating interest in Florida Gas Transmission.

Energy Transfer previously announced that it was selling a portion of Southern Union's original asset base to Laclede for $1 billion. The assets involved in the divestiture were Missouri Gas Energy and the New England Gas Company. Additionally, ETE announced last month that it would sell Southern Union Gas Services to its other MLP, Regency Energy Partners (NYSE: RGP  ) , for $1.5 billion.

Sunoco's assets include 4,900 gas stations and convenience stores and its stake in the midstream MLP Sunoco Logistics Partners (NYSE: SXL  ) . That stake is important; it is made up of 32.4% of SXL's limited partner units, as well as its general partner stake and incentive distribution rights. SXL's assets include more than 5,000 miles of crude oil pipelines, 2,500 miles of refined products pipelines, and 42 refined products terminals.

The other side of the deal
ETP obviously gets full control of all of the Southern Union and Sunoco assets. ETE will receive $1.4 billion in cash, and $2.35 billion in ETP units. ETE will forgo incentive distribution rights on the new units for the first eight consecutive quarters after the close. From there, it will receive 50% of the IDRs for eight consecutive quarters, then moving on to 100% receipt of IDRs.

Remember, many general partners forgo incentive distribution rights on big deals like this in order to give the MLP a chance to integrate assets and realize the commercial benefits of the transaction.

Foolish takeaway
Both Energy Transfer entities are touting this deal as a means to simplify organizational structure, and it certainly does that. Streamlining has been one of management's goals, and following through on this is important. Especially given that one of management's other goals is to increase distribution payments to investors.

Though its structure can be confusing, at its core Energy Transfer Partners is a company that helps alleviate the glut in supply with its 23,500 miles of transformational pipelines. Investors looking for a quick guide on ETP, and to see if its sizable dividend payment could be a good fit for your portfolio, you’re invited to check out The Motley Fool’s premium research report on the company. Simply click here now for a thorough expert analysis of this midstream company.


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