Why did ETE buy only the GP of RGNC? Why not go the Full Monty? ETE: The catalyst for this transaction was GEm which wanted some ownership of the MEP pipeline. ETE was not the catalyst. ETE/ETP could buy RGNC in the future. GE maintains some of their interest in RGNC.
Why extinguish units in ETP given the company's continued need of capital? ETE: By extinguishing the ETP units, it cuts their IDRs. Can ETE handle the debt load added by the preferred units? ETE: ETE has recently capped ETE distribution growth to allow for financial flexibility - thus it can handle the new preferred units. ETE will do a high yield debt offering in the future. Where will the savings to ETP be applied? ETE: It goes to fund future capital needs. and $86 million of forward capital obligation to ETP are transferred out by having MEP transferred out. And the combination will produce cap ex savings for both ETP and RGNC via less duplication of efforts in their forward cap ex projects.
What are the terms of preferred units? ETE: 300 million of preferred at 8% with mandatory conversion to ETE units in four years. Can be converted to 50% units and 50% cash at ETE's preference. $100 par for new preferreds. The two MLPs will still compete and by regulation must compete. But there is lots of Haynesville overlap for ETP and RGNC.
At the current time, 37% of every dollar generated by ETP goes to ETE - and that hurts ETPs growth. This acquisition helps shrink ETP's IDR burden. [ETE nay have implied that it shrinks the percentage IDR burden]. And 4% of every dollar generated by RGNC goes to its GP. The GP for RGNC has potential for substantial distribution growth as the IDRs from RGNC grows. Rating agencies will slit preferred units in some percent debt and some percent equity.
How much debt on MEP? ETE: $800 million in unsecured senior notes [I did not catch if that was ETP's share, or for the who project - same level of debt after completion. Does KMP need to sign off on transaction? ETE: No. Does transfer of MEP to RGNC effect ratings of MEP debt due to RGNC not having as high a rating on its debt? ETE: No. MEP cash flows will support the debt. MEP full start up in Q3 [?] of 2010. ETP has $650 million invested [in equity?] in MEP since start up. [And it is only getting $600 million for that investment?]
Why use the preferred structure in ETE to fund this? ETE: We did not want to issue more common units at this point. We thought about these issues. They will compete. There will be a conflicts committee. Both companies keep their own managements - which should insure continued competition.
What are the examples of cost savings? Personnel changes? ETE: It is our responsibility to streamline both partnerships. We do not have definitive answers to that at this time.
Has there been any Rating Agency feedback for ETP due to giving up MEP? Discussions continue. ETP's investment in MEP was not a needle mover [due to it being such a small percentage of total ETP assets]. Cash flows will be coming on [and moving up] from Tiger and other new cap ex. RGNC has compression in the Marcellus - will that open opportunities for ETE/ETP? ETE: Yes. And there is a second opportunity. ETP already has compression unit. ETP has patent on a compression patent system that generates less emissions abd has other advantages. Both ETP and RGNC can take advantage of those efficiencies of that better compression unit.
Both ETP and RGNC will have to change some credit agreements - that is one obstacle yet to be jumped.
Distribution coverage could go below 1.0x for ETE? ETE: The transaction is dilutive to ETE today. Still, we expect to see distribution increases in 2010 and certainly in 2011. ETE can cover a short term short fall in distribution coverage.
I do understand RGNC paid 26.27M units for its share of MEP but I also understand those units are not cash. RGNC now owns half of MEP in return for its promise to contribute $86M in cap-ex and its promise to pay distributions on the units it issued. There are not small commitments, but they are not cash.
I thought your notes on the two CC's were excellent. I especially liked Kelley's comment that interstate pipes like MEP are not "on the market" very often.
For $600 million of MEP, RGNC issues approximately 26.27 million in limited partner units - and they go to ETE. Given that RGNC is valued at $21.50/unit - ETE gets $564.805 million worth of RGNC plus the value of the GP and its IDR's. Does that mean the GP and the IDRs are valued at [600 - 565] only $35 million? that does not look right.
 RGNC had 93.17 million units - and the total units grow to 119.440 million. If $600 million of MEP sold at a price/EBITDA multiple of 10 [a guess], then RGNC gains $60 million in EBITDA for creating those 26.27 million new units.Prior EBITDA estimates for RGNC in2010 was $280 million [WF estimate which subtracts out 4% going to the GP] or $3.00/unit. the addition adds $60/26.27 or $2.28/unit. by that calculation, RGNC overpaid. Is the above calculation right?
Who is going to post their notes on the RGNC call?
The more I look at this deal, the less I understand. It looks more like an alliance than a purchase or sale, since no actual cash seems to have changed hands and GE ends up with some level of control over ETE via that convertible preferred issue. And it looks like it was put together rather hastily, or they'd have better answers to some of the CC questions.
On balance, I think RGNC ends up better off because they now own MEP and are that much closer to investment grade. I think we may see a distribution increase late this year.