Energy Transfer LP (NYSE: ET) has taken a significant step to restructure its capital stack, pricing $1.75 billion in new junior subordinated notes that could help the pipeline giant avoid a steep reset on its preferred shares later this year. The move, announced Monday, is designed to extend debt maturities and lower overall financing costs.
The company is issuing $650 million of 6.55% Series 2026A notes and $1.1 billion of 6.70% Series 2026B notes, both due in 2057. The weighted average initial interest cost stands at 6.64%. Net proceeds, estimated at $1.7325 billion before expenses, will be used to redeem all $900 million of its outstanding 6.5% Series H preferred units, pay down commercial paper or revolving credit balances, and for general partnership purposes. The transaction is expected to settle on July 20.
The timing is critical because the Series H preferred units have a floating-rate reset scheduled for November 15. The new rate will be set at the five-year U.S. Treasury yield plus a spread of 5.694 percentage points. Based on Friday’s five-year Treasury yield of 4.306%, the reset would push the Series H rate to approximately 10.0%. By retiring these preferred units before the reset, Energy Transfer avoids a significant jump in its preferred dividend costs.
On a pro forma basis, the swap generates modest net annual cash savings. The new notes carry an annual cost of roughly $116.3 million, offset by the elimination of $90 million in Series H dividends (assuming a 10% reset rate) and the repayment of up to $832.5 million in short-term debt that carried a weighted average rate of 3.95%. The net effect is an estimated $6.6 million reduction in annual cash outlays. However, compared to the current Series H rate of 6.5%, the new notes actually increase annual costs by about $24.9 million. These sums are relatively small against Energy Transfer’s first-quarter distributable cash flow of $2.70 billion.
Credit rating agency S&P Global Ratings assigned a BB+ rating to the new notes and indicated it will treat 50% of the issue as equity in its leverage calculations. This hybrid treatment allows Energy Transfer to raise long-term funding out to 2057 without fully impacting its debt metrics, supporting its investment-grade profile.
Energy Transfer shares closed the week at $19.66, up 1.7%, but lagged behind peers. Enterprise Products Partners (NYSE: EPD) rose 1.4% to $37.27, while The Williams Companies (NYSE: WMB) gained 2.6% to $75.02. Crude oil prices rallied, with WTI up nearly 4% to $71.41 and Brent advancing 5.5% to $76.01, supported by geopolitical tensions around the Strait of Hormuz and potential U.S.-Iran talks. “This market is ready, willing and able to jump on good news or at least no bad news,” said John Kilduff, partner at Again Capital.
Energy Transfer’s common units yield approximately 6.9% based on the current $1.35 annualized distribution. While higher risk-free rates can pressure such yields, the elimination of the preferred reset risk makes the equity income stream more sustainable. Investors will be watching next week’s U.S. CPI and PPI data, along with Federal Reserve Chair Kevin Warsh’s first monetary-policy testimony before Congress. “If we get hotter inflation … it could push odds of a rate increase higher by year end,” noted Anthony Saglimbene, chief market strategist at Ameriprise.
The $6.6 million projected saving is not guaranteed. It assumes the five-year Treasury yield holds at 4.306% at the November reset, that all excess proceeds are used to pay down debt, and that the short-term borrowing rate remains at 3.95%. Any change in these assumptions could eliminate the benefit. Energy Transfer is scheduled to report second-quarter results before the market opens on August 4, after the note settlement and ahead of the Series H redemption window that opens August 15.
