For the past few months, the market has been speculating that Energy Transfer Equity (ET 0.60%) would alter its current plans. The market was concerned that the company would cut its distribution and renegotiate its pending merger with Williams Companies (WMB 0.67%) because of weakening market conditions. The company, however, put an end to all of that speculation by announcing its distribution isn't going anywhere, and Bloomberg is reporting that the deal with Williams is likewise remaining status quo.
Holding the line on the distribution
Energy Transfer Equity announced on Wednesday evening that it was maintaining its current quarterly distribution rate at $0.285 per unit, ending speculation -- for the time being -- that a distribution cut was in order. The company was able to maintain its current payout rate largely because its namesake MLP Energy Transfer Partners (NYSE: ETP) was able to maintaining its current distribution. That's key, because Energy Transfer Equity owns the general partner and 100% of the incentive distribution rights of Energy Transfer Partners, so if its distribution was cut, that would impact Energy Transfer Equity's cash flow and, therefore, its ability to maintain its own payout.
Despite a weakening coverage ratio due to some impact from weaker commodity prices, Energy Transfer Partners is choosing to hold its payout steady because it has a huge backlog of capital projects coming online this year that will boost its cash flow. That said, financing that backlog was proving to be a challenge given the deteriorating capital markets for energy companies. However, instead of reducing its distribution to fund a portion of this backlog, the company is using other means, including asset sales and some spending cuts. Because of this, the company is in the position to fully fund its $4.2 billion growth capital funding needs internally, giving it the confidence to maintain its current rate while it completes the projects geared toward growing its cash flow.
Fully committed to the transaction
In addition to market worries about its distribution, the market is also worried about Energy Transfer Equity's ability to close its merger with Williams, partially because of concerns that Williams Companies' credit is deteriorating after credit rating agencies Moody's and Fitch cut its credit rating below investment grade. That's a concern because Energy Transfer and Williams need to borrow $6 billion in additional debt to pay for the cash portion of their transition.
A big concern with Williams credit is the company's outsized exposure to Chesapeake Energy (CHKA.Q). The driller is financially stressed right now because of weak commodity prices, which is worrisome because 20% of Williams gathering and processing revenue comes from Chesapeake Energy. Given its financial issues, Chesapeake Energy isn't likely to grow its production quite as fast as it had projected, which will slow volume growth at Williams. However, the merger will actually reduce Williams Companies' direct exposure to Chesapeake Energy significantly because it will be part of the much more diversified Energy Transfer Equity family.
Despite the market's concerns, both Williams Companies and Energy Transfer Equity remain committed to the transaction in its current form. However, it appears likely that instead of using the deal to drive strong distribution growth, Energy Transfer Equity might not grow its distribution quite as fast as planned, instead using some of its incremental cash flow to reduce its debt until market conditions improve.
Energy Transfer Equity remains committed to its current plan. The company can clearly see that its namesake MLP is able to fully fund its capex requirements, with those projects expected to deliver strong cash flow growth later this year. Further, it has long seen the strategic benefits of acquiring Williams Companies and isn't going to back down now that it finally has its target locked down. While it might have to forsake growing its distribution for a while to reduce its leverage, that's a price it's willing to pay in order to bring Williams into the fold.