Energy Transfer Partners LP (ETP) and affiliate Regency Energy Partners LP on Monday agreed to merge in a transaction estimated to be worth $18 billion, creating one of the largest master limited partnerships (MLP) with operations in nearly all major producing areas of the United States.
Set to close by the end of June, the transaction includes a one-time cash payment to Regency unitholders and $6.8 billion in debt and liabilities. The combination would create the second-largest MLP in the United States after Kinder Morgan Energy Partners LP.
"ETP and Regency expect to capitalize on the full breadth of the combined gathering and processing platforms in several prolific producing regions, including the Permian Basin and Eagle Ford Shale," management said. ETP altogether controls about 35,000 miles of natural gas and natural gas liquids (NGL) pipelines.
Among the benefits of the Regency merger "is the likelihood" of further NGL volume growth in Texas for their joint venture, Lone Star NGL LLC, which is expanding volumes into ETP’s intrastate pipeline system (see Daily GPI, Nov. 17, 2014).
Appalachia business also is seen benefiting with the merger, where Regency's growing operations are seen as a complement to ETP's 3.25 Bcf/d Rover pipeline now under construction (see Shale Daily, Oct. 31, 2014; Oct. 11, 2013).
"The presence of ETP and Regency in these shales will also be complemented by the significant activity of Sunoco Logistics Partners LP, another member of the Energy Transfer family, as it builds on its asset base in that area," ETP management noted. ETP purchased Sunoco in 2012 (see Shale Daily, May 1, 2012). "Overall, ETP intends to become a major player in the Marcellus and Utica shales," and said the Regency merger positions it to achieve that goal in the near term.
For Regency, the deal provides more financial assurance in uncertain times.
"In light of the current volatility in commodity prices and the changes in the capital markets, it became apparent over the last several months that Regency needed more scale and diversification, along with an investment grade balance sheet, to continue its growth," Regency CEO Mike Bradley said. "As a result, the combination with ETP became a logical transaction, as we believe that this merger will create significant immediate and long-term value for our unitholders.
"The merger will also allow Regency and ETP to consolidate our complementary midstream operations in the Permian and West Texas areas. The ability to bring those operations together under one roof is expected to create tremendous value for the unitholders of the combined partnerships."
Under the terms of the agreement, Regency unitholders would receive 0.4066 ETP common units and a cash payment of 32 cents/unit, implying an all-in price of $26.89/unit. The price is a 13% premium to the closing price on Friday.
"The proposed merger has been discussed with the ratings agencies and it is anticipated that the merger will have no impact to ETP’s credit ratings and that Regency’s ratings will be put on review for upgrade," ETP noted.
On the news, Moody's Investors Service placed under review for upgrade Regency ratings and affirmed ETP’s rating and stable outlook. "Weak energy commodity prices have pressured valuations in the gathering and processing (G&P) segment of the midstream energy sector," said Vice President Andrew Brooks. "Financing the continuing growth of Regency's investment in G&P will benefit from ETP's investment grade balance sheet and lower cost of capital, while ETP will gain additional scale and scope across its diversified midstream asset base through the Regency acquisition.”
Energy Transfer Equity LP, which owns the general partner and 100% of the incentive distribution rights (IDR) of Regency and ETP, has agreed to reduce the IDRs it receives from ETP by a total of $320 million over a five-year period. The IDR subsidy would be $80 million in the first year post-closing and $60 million/year for the following four years. Completing the merger requires approval by the unitholders and various entities.