Reflecting on the various brokerage reports and discussion with ETP hasa brought me to two conclusions.
The pipeline acquisition will not initially be as accretive as many would have hoped. It will take not only the initial purchase, but the build out as well to derive much benefit to the unitholders.
Second and more production is that a FERC regulated pipeline will provide stability in earnings going forward. There is considerable benefit here it that it will guarantee a smoother EBITDA and DCF going forward. This should allow the distribution rate over the next couple of years to grow faster than the DCF because of the predictability and stability of earnings. In possibly simplier terms, ETP will no longer need a 1.3X coverage ration and can cut the coverage to 1.1X. This should allow a distribution increase to over $3.00 within a few quarters and a huge CAGR over the next 2 years.
arbtrdr, do you still see concerns for this deal now? You're $3.00 distribution for ETP was achieved today, several quarters ahead of schedule. can you imagine what the GP distribution will be? The market is finally turning the corner on this one.
I sense some conservatism on this board - a bit perplexing considering ETP's history. This mgmt team has proven they're the most capable in the industry. They have a very versatile asset base and are forward thinking. Arguably, we're looking at the best pipeline company in the business. And yet everybody on this board will be shocked - perhaps pleasantly surprised is a better way to put it - at 2006 earnings.
I've posted on several occassions that this MLP is just beginning to grow. The TW deal, the expansion into Phoenix, and the other recently announced organics growth projects push this company well over 1 billion in earnings. DCF will continue to be the best in the industry.
Yes, I still see concerns on ETP going forward, particularly in '08. As I said the stability of EBITDA from the pipeline allows ETP to distribute more of its DCF and should smooth out earnings. They went immediately to $3 instead of stepping it up over the next 3 quarters as most others and myself had predicted. This only means slower distributions in '07 than I had in my model.
I am not pessimistic at all. ETP is a great company and has done great things. The market however has put a penalty in the short run on organic growth projects because they temporarily reduce DCF. This is what will happen to ETP in 2006 with a plan that now has over $1B in organic projects.
For myself this just creates buying opportunities since the organic projects tend to be much more accretive to both EBITDA and DCF. My only disagreement with you is that ETP is NOT just beginning to grow. It has had several years of very strong growth and is poised for two more years of similar to even faster growth. The difficult period comes after that as to how it can continue to maintain the growth either in magnitude or %. That part becomes ever more difficult. Remember MWE can grow 10% with a $100M organic project. EPD requires a $1B project for the same growth. Similarly with the 50/50 incentive split it is troubling that a $1.5B purchase combined with a $700M expansion can only increase the distribution by .08 to .13! In those numbers is the real difficulty unless of course you own ETE.