Finances are tight right now at natural gas pipeline giant Energy Transfer Partners (NYSE:ETP) given its bloated balance sheet, stalled megaproject, and the fact it has several more projects in the pipeline to finance this year. While the company is working toward a longer-term solution to those problems by merging with oil pipeline sibling Sunoco Logistics Partners (NYSE:SXL), it needs cash in the interim. To bridge that gap the company is selling units to its parent company and general partner, Energy Transfer Equity (NYSE:ET), in a two-step transaction that should close later this week.
Drilling down into the deals
Energy Transfer Partners will issue 15.8 million common units to Energy Transfer Equity in exchange for $568 million in cash. Overall, it is selling these units for roughly $36 apiece, which is less than a 5% discount to last week's closing price. The partnership primarily intends to use the money for debt repayment. That said, for a company that had more than $29 billion of outstanding debt at the end of the third quarter, this transaction will not lead to any meaningful improvement in its leverage, though every little bit helps.
While Energy Transfer Equity is in a stronger financial position than its namesake MLP, it does not have that much cash lying around. As a result, it too has entered into an agreement to sell some of its common units to raise cash, which it intends to do via a private placement with outside investors. Under the terms of that deal, Energy Transfer Equity expects to sell 32.2 million of its common units for about $580 million in cash, which it will then use to buy units from its MLP.
What's noteworthy about this transaction is that neither company is accessing the public equity market to raise cash. Instead, Energy Transfer Equity chose to tap private investors who paid an average of $18 per unit. While that is 10% below the level at which units traded last week, the company likely would have needed to sell new units at an even steeper discount via an open market secondary offering. For example, last month natural gas driller Gulfport Energy priced a public offering at $21.50 per share, which was more than 20% below its trading price before the offering. Deep discounts like that are often necessary to entice public market investors to sop up the additional inventory quickly.
Delays are adding up
Energy Transfer Partners likely wouldn't have needed to seek this handout if it were not for the continued delays that have stalled completion of its $4.8 billion Bakken Pipeline System. The company initially anticipated that the project would go into service at the end of last year, but it was denied a key permit due to intense opposition surrounding the pipeline's crossing of a river in North Dakota. Those delays had cost the company an estimated $450 million through early December, and continued delays were expected to cost it $83 million per month.
In addition to delaying the cash flow anticipated from that project, the work stoppage has also delayed the closing of a transaction to monetize a portion of the pipeline. Back in August Energy Transfer Partners and Sunoco Logistics Partners agreed to sell a 36.75% stake in the project to a joint venture owned by MLP Enbridge Energy Partners (NYSE:EEP) and refiner Marathon Petroleum (NYSE:MPC). That venture agreed to pay $2 billion for the stake, with $1.2 billion of that cash going directly to Energy Transfer and the balance heading to Sunoco's coffers, allowing both companies to pay down debt and finance growth projects. Further, Enbridge Energy Partners and Marathon Petroleum agreed to fund 36.75% of the project's remaining capital expenditure, which would reduce the funding requirements of Sunoco and Energy Transfer. That sale was initially expected to close in the third quarter of last year but has yet to close due to the permit issues, thus necessitating today's equity issuance.
Energy Transfer has been trying to avoid issuing equity to public market investors because such a move could lead to significant dilution of current investors' value. It was able to bypass that situation by tapping private investors instead, who did not require such a steep discount. That move enabled Energy Transfer Equity to help out its MLP after its Bakken Pipeline became a political hot potato costing the company cash flow and a quick closing on a deal for an important cash infusion.