Energy Transfer Equity was downgraded by Moody’s in 2012 after buying Southern Union Co., a Houston natural gas pipeline company, for $9.4 billion. Like fellow pipeline giant Kinder Morgan, ETE debt is designated as “speculative.”
But since then, as it’s taken on an additional $7.9 billion in debt, its credit rating has held steady.
In its reports, Moody’s continually presses the companies to reduce leverage and get rid of complex corporate structure to improve financial transparency. But so far it has not threatened a further downgrade.
No company taxes
Energy Transfer, like many pipeline companies, operates under a master limited partnership structure under which the company does not pay taxes — its shareholders do. But it also leaves a company with higher capital costs that necessitate growth, said Andrew Brooks, the Moody’s analyst who covers Energy Transfer.
“A typical company wants to grow. But with an MLP structure, because of these incentive distribution rights, you have an expectation it’s going to grow,” he said.
Investors have flocked to pipeline companies in recent years as a safer alternative to investing in oil and natural gas companies.
An executive with one of Wall Street’s largest investment banks said earlier this year that prices on energy companies in general had gotten so high they anticipated a slowdown in deals. Asked about Warren’s deal making, the executive, who declined to speak on the record, labeled his transactions “aggressive.”
“Right now, given the money that’s flooded into the MLP space over the last five years in the chase for yield, you have prices being paid that are not justified by the underlying economics,” said Bill Powers, an independent analyst and energy investor. “I think there’s going to be a lot of disappointed investors.”
In 2012, Warren, 58, donated a reported $10 million to fund the construction of Klyde Warren Park over Woodall Rodgers Freeway. But he is the son of an East Texas pipeline worker and has seen the energy business from all levels. In an interview two years ago, he readily acknowledged the volatile nature of the industry.
“It’s feast or famine. You position yourself to survive the troughs and you excel in the peaks. If you start taking yourself too seriously, you’ve got a problem,” Warren said.
Follow James Osborne on Twitter at @osborneja.