Kelcy Warren Says $1 Billion Deal Helped Stabilize Company

(Bloomberg) -- Kelcy Warren, the billionaire chairman of Energy Transfer Equity LP, dismissed complaints that he unfairly benefited from a 2016 private issuance of units in one of the pipeline company’s partnerships that was tied to the failed merger with Williams Co.

Unitholders, including a Pennsylvania retirement fund, contend Warren and other Energy Transfer executives engineered the $1 billion deal involving only select investors so that Warren could reap more than $200 million.

“Everybody thinks this is a bad deal,’’ Warren told a Delaware judge Tuesday. But the issuance helped stabilize the U.S.’s largest pipeline operator during a shaky time in an oil market downturn, he added.

Warren’s lawyers said in court filings the deal was designed to raise cash for Energy Transfer’s $38 billion buyout of Williams Cos., a rival pipeline operator. Investors received the more than 329 million new units in exchange for forgoing dividend payments for more than two years.

Warren got 57 percent of the new units, according to Securities and Exchange Commission filings. Disgruntled partnership participants complained the deal created a “superpriority” class of unitholders whose cash distributions would be protected even if the company cut payouts to other owners.

Unhappy investors also zeroed in on terms of the issuance that guaranteed the billionaire more than $200 million a year in payments at the expense of Williams’ shareholders and other Energy Transfer investors.

Tax Flaw

In June 2016, Chancery Court Judge Sam Glasscock III concluded a tax flaw in the buyout’s terms –- discovered by Energy Transfer officials -- allowed Warren to scuttle the acquisition. Energy Transfer’s management had concluded a plunge in oil prices made the deal economically unsound.

Warren acknowledged in Tuesday’s testimony that Energy Transfer’s executives weighed cutting partnership distributions to raise cash for the Williams deal and address the pipeline operator’s debt.

“Nobody wants to acknowledge how bad things were in 2016,” he said. Warren recalled he told his counterparts at Williams they would be “merging with a sick entity.”

While the merger foundered, suits over the private-unit issuance survived and Glassock will be asked to decide if the issuance violated the partnership agreement and whether the deal was flawed by unaddressed conflicts of interest

‘Egregious’ Offering

Lee Levine, who holds about 55,000 Energy Transfer Equity common units, testified Monday that he found the private offering “egregious” and unfair. Levine wasn’t offered to participate in the issuance, but said he would’ve been interested given the chance. While Levine agreed it was important for the company to maintain its credit rating, he doubted whether the issuance helped prevent a downgrade.

A private offering has to be kept to a limited group of investors, Chief Financial Officer Tom Long said in court Monday. The company reached out to investors who had been in the industry a long time and were seen as having the appetite for the issuance and the restrictions it came with, he said. It was “very material” to reaching Energy Transfer’s credit goals, Long said.

Warren also brushed aside investors’ allegations that conflicts of interest tainted the unit deal by saying he tapped a company executive to serve as a one-man conflicts committee. Lawyers and financial advisers also reviewed the issuance for fairness.

“I regret I couldn’t offer it to all unitholders,” but his counterparts at Williams refused to allow a public offering, Warren said. Nonetheless, the deal “was fair,” Warren added.

The case is IN RE Energy Transfer Equity LP Unitholder Litigation, No. 12197, Delaware Chancery Court (Georgetown).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net, Meenal Vamburkar in New York at mvamburkar@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Carlos Caminada, Joe Carroll

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