Morningstar | Energy Transfer Partners Unitholders Best Off to Vote for Consolidation
We are reaffirming our $28 per unit fair value estimates for Energy Transfer Partners and $22 per share fair value estimate for Energy Transfer Equity based on the proposed $27 billion equity consolidation terms detailed in the Form S-4 that ETE filed Aug. 14.We continue to believe that ETP common unitholders should vote in favor of the deal at the 1.28 unit exchange ratio. The deal represents a 28% premium to what we considered a fair exchange ratio. A majority of unaffiliated ETP common unitholders must approve the transaction.
Even though the consolidation will result in an effective 31% distribution cut for ETP unitholders, it relieves the burden of incentive distribution rights, or IDRs, which were set to send some $2 billion, or 48% of ETP's cash distribution, to ETE. ETP's equivalent quarterly distribution payment will fall to $0.39 per unit based on ETE's current $0.305 per unit quarterly distribution payment, down from ETP's current $0.565 per unit distribution payment. We expect the the deal to close by year-end.
The ETP distribution cut effectively represents the value transfer that was about to commence once ETE turned off its IDR subsidies. The IDR burden and ETP's investment plans likely would have meant no distribution growth for ETP for the foreseeable future. The consolidation allows Energy Transfer to resume distribution growth, likely in 2020.
ETE already was effectively financing ETP's growth through the IDR subsidies, so the deal doesn't change Energy Transfer's consolidated economics. However, it gives ETP access to ETE's stronger balance sheet to support growth investment, a win-win for both sides. We continue to believe Energy Transfer faces a drop-off in growth beyond 2020 unless it finds new projects.
CEO and Chairman Kelcy Warren will retain a 31% voting interest in the consolidated entity. We think Warren has been a good steward of unitholders' capital, but insider control is an issue investors should monitor closely.
Energy Transfer Partners, through its subsidiaries, conduct activities such as natural gas operations; and interstate natural gas transportation and storage; and crude oil, natural gas liquid and refined product. The company's segment includes: Intrastate Transportation and Storage, which owns and operates a natural gas open-access interstate pipeline network; Midstream, which consists of natural gas gathering, compression, treating, processing, storage, and transportation; NGL and Refined Products Transportation and Services, which transport, store and execute acquisition and marketing activities utilizing a network of pipelines, storage and blending facilities.
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