ETP: Consolidation Not Likely in 2011

DARREN HOROWITZ, Raymond James (11/16/2010)
"While Energy Transfer now has the second largest general partner (GP) cash-flow take across our entire coverage universe, a possible consolidation announcement is most likely not on the table in 2011. The largest hurdle standing in the way of a possible GP/LP transaction at ETP is the $1.8 billion of debt held by Energy Transfer Equity. For reference, the GP recently refinanced all of its outstanding debt through the issuance of $1.8B in 10-year 7.5% senior notes in September 2010. If the LP were to purchase ETE, it would have to take on all of the GP's debt with no associated improvement in EBITDA.

We are currently forecasting for ETP to exit 2011 with a debt/EBITDA ratio of ~3.4x. However, pro forma a possible GP consolidation, the partnership would exit next year with a leverage ratio of at ~4.6x—well above the peer average of ~3.4x and closing in on the financial covenants in the partnership's credit facility that require it to maintain a leverage ratio below 5.0x, with a permitted increase to 5.5x following an acquisition. . .our current cash-flow estimates imply ETP will run tight distribution coverage of 1.04x in 2011 when incorporating distribution growth of 4.2% in 2011. Even if we assume the partnership keeps its distribution flat in 2011, total coverage only improves to 1.09x; thus, there is little room for near-term dilution in 2011 that could come from the possible buyout of the GP."

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