I am wondering why ETE/ETP recently issued $600M in debt at a whopping 850 basis points above treasury - when they are rated barely investment grade [not that I believe Moody's or S&P or Fitch. They go in lock-step with each other and screw up all the time].
Anyway, since ETE/ETP earns over 12% on its capital, this isn't necessarily bad, but can they deliver in this era of decreasing energy use and oil prices ? it will take us Americans a good five years to get over the shock of $4.50/gallon gasoline.
The market wasn't kinder to Kinder-Morgan, and they issued a similar quantity of debt at similar terms to what ETP/ETE did, but ETP/ETE can buy back their binds for a pretty small premium in 2012.
Energy Transfer Partners ETP and Kinder Morgan Energy Partners KMP Analyst Note 12-18-2008 | Jason Stevens Morningstar
Kinder Morgan Energy Partners is breaking through the frozen capital markets this week by raising $500 million in new debt and roughly $200 mill ion in additional equity. The question on our minds is why Kinder is seeking to raise so much capital at relatively expensive rates: 9% for the 10-year senior notes and a cash yield of nearly 9% on the equity component. While Kinder's filing says the proceeds will be used to pay down outstanding borrowings on revolving credit lines and for general purposes, we wonder whether this is the full explanation. Kinder has a $250 million note maturing in February, but does not specifically need to raise cash to meet this obligation, in our view. We think Kinder is building a war chest to see it through potential tough times ahead.
In addition to Kinder, Energy Transfer Partners, Enterprise Products Partners EPD, Enbridge Energy Partners EEP, and TC Pipelines TCLP have either come to market with debt issuances or filed registration statements for new debt or equity offerings in the past two weeks. These master limited partnerships have fee-based cash flows and attractive growth projects, but none of them, in our opinion, explicitly need to raise additional capital at historically high rates. From a liquidity standpoint, they could use capacity on existing bank lines for most or all of 2009 capital needs. So why raise cash at 9%-10%? We suspect that these companies fear capital markets could get worse before they get better. This thinking would suggest that those that can access markets, do. Those that can't, we suppose, hope markets get better soon. Taking advantage of the current, and perhaps evanescent, thawing in debt and now equity markets shows the best sort of opportunism, in our view.
Given the recent market volatility and given that I have a majority of my investment portfolio in ETP; I have been a little concerned about the recent unit price decline and decided to get in contact with investor relations to see if I could get a better handle on the JV with OGE and the $600M debt offering.
They actually called me after I sent them an email requesting information on this debt offering and expressed my concerns over the over 9% rate. I also asked about the JV with OGE. It should be noted; I emailed at 8:30pm EST and got a call within 15 minutes. Talk about customer service... 5 STARS
Here is what I learned:
As suspected ETP does NOT have a cash flow problem, but given the potential for inflation and to hedge against possible higher interest rates if the credit markets once again over tighten, they decided to increase liquidity now and use some of that money to pay down revolving credit. This would effectively reduce the cost of the debt offering and build a reserve 'war chest' to fund future expansion.
With regard to the JV with OGE; ETP is moving forward to spite possible complications other parties may have. While they recognize the other parties may be having difficulties at the moment; not one of the parties involved is talking about terminating this JV.
The gas reserves in OK and the additional infrastructure are very exciting prospects. While ETP has not included the potential benefit in estimates for 2009 earnings I was told it has the potential to be very substantial.
While it is purely speculative on my part I was left with the impression that something is in the works which may provide a pleasant surprise to unit holders. But when pressed I was told that it could not be disclosed at this time.
I hope this helps clarify some of the recent news releases out there...