The last five years have been tough for Energy Transfer Partners (NYSE:ETP) unit holders, as the partnership has kept its distribution flat at $0.89375 per unit. To be sure, it's a nice payout, but when many of ETP's midstream peers continued to raise their distributions through the economic doldrums of 2009, frankly, it wasn't enough to entice many investors to buy more units, and Energy Transfer's share price stagnated.
That ends today, as Energy Transfer Partners has officially announced that it will increase its distribution by $0.01 per quarter for the third and fourth quarters of this year. Here's what you need to know.
Greatest acquisition ever
Energy Transfer's acquisition of Sunoco did a lot to diversify the partnership away from natural gas, enhancing its footprint to include crude oil and retail assets. More importantly, as investors have come to realize, the acquisition also gave Energy Transfer the general partner stake and incentive distribution rights in Sunoco Logistics (NYSE:SXL), itself a midstream master limited partnership.
That stake is the driving force behind the distribution increase.
The stake in Sunoco Logistics is compelling enough -- $94 million in distributions so far this year -- that ETP's general partner, Energy Transfer Equity (NYSE:ETE) is handing over 50.16 million common units of ETP in exchange for half of ETP's general partner stake and IDRs in Sunoco Logistics. ETP will be issuing special Class H units that track those two stakes. From the press release: "As a result of the significant cash flow accretion expected to be realized by ETP from this transaction ($0.25-$0.35 per common unit per annum), ETP anticipates an increase of $0.01 per common unit per quarter for each of the quarters ending September 30 and December 31, 2013."
The move corresponds with ETE's desire to revert to a pure general partner, and the H units will come along with $329 million spread over 15 quarters to compensate for IDRs that ETE has waived in the past.
But really, ETP and its investors are the winners here. Getting these common units back reduces the partnership's common units by more than 13%, triggering significant improvement on its distribution coverage ratio, which sat at 0.95 times payouts at the end of the second quarter. ETP is now targeting a distribution coverage ratio of 1.05 times payouts for the foreseeable future.
Underlying fundamentals remain as important as ever, but the distribution growth, should it prove sustainable, will do wonders for ETP's share price. Part of what is driving investor interest in MLPs is that they are more than just a fixed-income substitute for bonds; they are high-yielding growth vehicles that have showed considerable price appreciation over the past three to four years. Energy Transfer Partners is now ready to join its peers on the climb.
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