Diversification is good, but too much differentiation can weaken a company's focus on the execution of its core business plan. Energy Transfer Partners' (ETP) foray into owning and operating a retail fuel-distribution business was a bit too differentiated from its core pipeline business, and it never made sense for it to own these assets.
That's the reason why I think the company's best moves this year were the three drop-down transactions that moved its retail business to Sunoco LP (SUN 0.90%). These moves enabled Energy Transfer Partners to turn all of its attention to owning, operating, and building energy-infrastructure assets.
The initial Sunoco, LLC equity drop
Back in March, Energy Transfer Partners announced a drop down of a portion of its retail business to Sunoco LP. In that deal, the company sold a 31.58% equity interest in Sunoco, LLC, which distributes 5.3 million gallons of motor fuel per year to customers in the east, midwest, and southeast regions, for $775 million in cash and $40.8 million of its units.
This deal did three things for Energy Transfer Partners: It boosted its balance sheet and cash flow, and moved it another step forward on its plan to exit retail.
The Susser Holdings drop
In July, Energy Transfer Partners completed an even larger drop-down transaction. This time, it sent 100% of Susser Holdings Corp. to Sunoco LP, which paid $1.94 billion, and used a blend of 50% cash and 50% equity to complete the deal. In doing so, it acquired a company that operates convenience stores in Texas, New Mexico, and Oklahoma under the Stripes convenience-store brand.
One of the major accomplishments of this deal was the nearly $1 billion upfront cash payment that Energy Transfer Partners received. The company plans to use the cash to fund the equity portion of its $10-billion capital-project backlog.
Simultaneously with that transaction, Energy Transfer Partners transferred its general partner interest and the incentive distribution rights of Sunoco LP to Energy Transfer Equity (ET). In that deal, it received back its own units, valued at $1.2 billion, which were held by its parent company. The deal was akin to a unit buyback whereby it used its general-partner interests in Sunoco LP as a currency instead of cash.
The unexpected final drop
Energy Transfer Partners had planned to complete its retail exit by the end of 2016. However, in mid-November, it agreed to one final drop-down deal with Sunoco LP. In this $2.226 billion deal, Sunoco LP acquired the remaining 68.42% of Sunoco, LLC that it didn't already own, as well as 100% of the legacy Sunoco retail business in exchange for $2.2 billion in cash. This included the value of working capital, and approximately $194 million of its units.
The large cash component of this deal is really important to Energy Transfer Partners given the aforementioned capital needs to fund its project backlog. The company believes that it will now only have to issue a minimal amount of equity to fund its 2016 capital program, which could also be funded via non-core asset sales such as the Sunoco LP units it has amassed via the drop-down deals. Minimizing its equity needs is crucial given the significant drop in the company's unit price over the past few months, after the downturn in the energy sector started to weigh on MLPs.
Energy Transfer Partners' best moves this year were those that hastened its exit from retail. Not only did the company accomplish this goal a year earlier than planned, but it was able to receive a substantial amount of cash for its retail assets.
That cash will help fund the majority of the equity portion of its capital needs in 2016, largely keeping the company out of the capital market at a time when that market isn't as friendly to MLPs. These are moves that could really pay big dividends down the road when the market starts to recover.