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Regency Energy Partners LP Message Board

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  • lner2512 lner2512 May 12, 2010 12:57 PM Flag

    ETE's CC on RGNC's GP purchase

    I do not understand how much real substance there is to a deal that apparently involves no current cash consideration. The winner seems to be RGNC, which makes me think Byron Kelley may have engineered the deal as a way to get an interstate pipeline and further his goal of achieving investment grade for RGNC. All the deal cost RGNC was $86M in future cap-ex and future additional distributions. So far, the market seems to agree--RGNC continues to climb, while ETE and ETP decline.

    ETE will now be GP for two MLPs in direct competition with each other, but could not satisfactorily answer questions about how that will be handled. A "Conflicts Committee"? I doubt that will work well and it does not evidence much forethought.

    ETE was also vague about possible cost savings; seemingly, they had not given that subject much thought either.

    ETE did not seem to have talked yet with the rating agencies, nor did either party say they had talked with their banks. I see the ratings agencies have begun to downgrade ETE today.

    On balance, RGNC seems to have known they wanted the MEP and gotten it without any current cash outlay. I think it is telling that they seem to have been better prepared to answer questions about the deal than ETE. And I wonder how Kelcy Warren will manage ETE with both Duncan's people and GE's people on his board.

    BTW, these are not questions I really expect anyone to be able to answer now; only time will tell. But I value your input, as always!

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    • lner2512 wrote: "I do not understand how much real substance there is to a deal that apparently involves no current cash consideration. . . . . All the deal cost RGNC was $86M in future cap-ex and future additional distributions . . . . . So far, the market seems to agree--RGNC continues to climb."

      [1] KMP on 4-21 in its earnings release stated "Including expansions, the current estimated cost of the entire MEP project remains $2.3 billion. MEP is a joint venture with Energy Transfer Partners." As on market close on 5-11, RGNC closed at $22.42. RGNC will still fund $86 million for the yet to be completed portion of MEP. RGNC paid 26.27 million units for MEP - thus based on yesterday's price, it paid [$588.970 + $86.000] $674.973 million for [49.9% of $2.3] $1.148 billion of new assets serving credit worthy customers who have long term contracts that use 100% of the pipelines capacity. I was initially bothered by the "five-year services agreement" costing $10 million/year. But given the rest of the deal, I am not concern about that big detail today.

      [2] Actual price changes are reacting to logical increases in the analyst price targets. Price targets are derived by formula. And the RGNC acquisition of MEP changes its DCF projection, its CAGR projection, and its credit metrics that effect and lower its RRR requirements, the mix of assets that increases its transportation or fixed fee revenues that also reduce its RRR requirements. This one large transaction changes and improves every component that goes into the distribution discount model. So of course, it is going to significantly increase the price target.

      [3] I agree, ETE was not prepped for their conference call.

      [4] I included a link to my notes on the RGNC call - a post that has only two ratings and zero comments. At this point, the folks at IV having given the message 39 positive ratings. What's up with that? Are you not getting the link to work?

    • The lack of public reaction by EPE, and the increase in its share price would signal the deal's a positive for ETE/ETP. The share prices of those MLPs indicate the opposite.

      Giving allowance for the suddeness and lack of clarity on the effects over the medium and long term, I expect we'll find Kelcy Warren has opened up opportunities for future growth for ETE/ETP.

      ETE/ETP seemed to be moving toward a slower growth rate. There will be much pipe laying and product processing in the next ten years or more and Warren may be focussing on that. While increasing the transport in RGNC he's broadened ETE holdings into midstream and wastewater treatment.

      Is this a good move for ETE, ETP, RGNC, EPE? I hope so. Is it good for limited partners? Yes, if it provides access to financing, talent and a broader range of projects that can grow the distribution. Just my thoughts based on hope and limited knowledge and information.

 
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