There are plenty of ways to wring shareholder value out of a company, and the more of them that can be employed, the better. In this case, we have a company creating valuable synergies with its partners, building new pipelines and all with a nice distribution yield.
Energy Transfer Partners LP ETP, +0.42% hiked its first-quarter distribution by about 8% from year-ago levels and generated enough cash flow to cover 118% of this higher payout. Some of this upside came from the partnership’s wheeling and dealing with its general partner, Energy Transfer Equity LP ETE, +0.74% and its sister MLP, Sunoco LP SUN, +1.55% in a series of kick-up and drop-down transactions.
For example, Energy Transfer Equity retired 30.8 million of Energy Transfer Partners’ common units in the first quarter, paid the master limited partnership (MLP) $879 million in cash and transferred a 45% interest in a pipeline project that will transport crude oil from the Bakken Shale.
In exchange, Energy Transfer Partners kicked up the bulk of its remaining general-partner interest and incentive distribution rights in Sunoco Logistics Partners LP SXL, +0.96% to Energy Transfer Partners.
During the first quarter, Energy Transfer Partners also sold a 31.58% stake in its wholesale fuel-distribution business to Sunoco LP for $775 million in cash and 795,482 common units. Energy Transfer Partners plans to drop down the remaining interests in these assets to Sunoco LP over the next two years, providing another source of liquidity.
At some point, Energy Transfer Partners can kick up the general-partner interest in Sunoco LP to Energy Transfer Equity in exchange for more unit retirements or other considerations.
On Energy Transfer Partners’ first-quarter earnings call, management also provided an update on the opportunities created by its acquisition of Regency Energy Partners LP, which closed on April 30. We analyzed this deal at length in Energy Transfer Partners LP to acquire Regency Energy Partners LP.
Management estimated that if the transaction had closed in the first quarter, Energy Transfer Partners’ distribution coverage would have slipped to 104%, reflecting the equity issued to close the deal. However, this coverage rate improves to 110% when you factor in $165 million to $225 million in recurring synergies.