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Williams Rolling Up MLP, Embracing Simpler C-Corp. Structure

Williams is to acquire all of the outstanding units of Williams Partners LP in an all stock-for-unit deal that will lower the cost of capital for Williams and simplify its structure. The transaction follows a similar move by Kinder Morgan Inc. last year that did away with its master limited partnership (MLP) structure.

"We continue to see an expanding portfolio of projects to connect the best supplies of natural gas and natural gas products to the best markets," said Williams CEO Alan Armstrong. "The lower cost of capital and improved tax benefits expected from this transaction increase our confidence in extending the duration of our expected 10% to 15% dividend growth rate through 2020."

Williams Partners unitholders are to get 1.115 Williams common shares per unit. The implied Williams Partners unit price as of May 12 represents a 14.5% premium to its 10-trading day average closing price and a 12.6% premium to its 20-trading day average closing price. The transaction is expected to close during the third quarter and create "one of the largest and fastest-growing high-dividend paying C-Corp.s in the energy sector with an industry-leading 10%to 15% annual dividend growth rate through 2020," Williams said.

The combined entity is expected to generate adjusted EBITDA of approximately $5.4 billion in 2016. The combined entity expects to pay a third quarter 2015 dividend of 64 cents/share, or $2.56/share on an annual basis, up 6.7% over Williams' previously planned third quarter 2015 dividend of 60 cents/share. Dividends for 2016 are expected to total $2.85 per share, about 20% above Williams' previously guided 2015 dividend and 6.3% above its previously guided 2016 dividend.

"This transaction simplifies our corporate structure, streamlines governance and positions Williams for strong investment-grade credit ratings," Armstrong said. "We anticipate significant market valuation upside and lower cost of capital for new fee-based growth projects along with incremental growth through strategically aligned [merger and acquisition] activities. Our roster of large-scale, fully contracted infrastructure projects will drive extraordinary adjusted [earnings before interest, taxes, depreciation and amortization] growth from an expected $5.4 billion in 2016 to $6.8 billion in 2018."

In aggregate, Williams plans to issue 275.4 million shares in connection with the proposed transaction, representing 27% of the total shares outstanding of the combined entity. The transaction will be taxable to Williams Partners unitholders, and Williams will receive the tax benefits from the asset step-up to be realized over a 15-year period.

Doug Getten, a partner with law firm Paul Hastings LLP, told NGI the Kinder and Williams MLP roll-ups are not indicative of any trend that MLPs are falling out of favor. However, these transactions and other recent deals combining MLPs serve to simplify business structures and, as in the case of Kinder and Williams, can improve access to capital. "It's really just a matter of where the economics make sense as far as which entity should survive, whether it's the MLP or the C-Corp.," Getten said.

Williams said it has reviewed the transaction with credit rating agencies and expects that the combined entity "will have strong investment-grade credit ratings consistent with Williams Partners' current ratings and outlook."

Moody's Investors Service placed the "Baa3" senior unsecured ratings of Williams under review for upgrade and affirmed Williams Partners' "Baa2" senior unsecured ratings, Prime -2 short-term rating, and the "Baa1" ratings of the partnership's pipeline subsidiaries, Northwest Pipeline and Transcontinental Gas Pipeline Co. (Transco) with "stable" outlooks.

"The announced transaction will simplify Williams' capital structure and reduce the company's cost of capital," said Pete Speer, Moody's senior vice president. "The anticipated 'Baa2' rating for the combined Williams and [Williams Partners] is dependent on Williams' successful delivery of its forecasted cash flow growth and its commitment to using enough equity funding of its growth capital spending to reduce its currently high leverage.

"The reorganization is designed to simplify the capital structure and utilize Williams' equity for funding future growth since it trades at a much lower dividend yield than [Williams Partners] and thereby provides a more competitive cost of capital relative to other large capitalization corporate and MLP midstream energy peers. The proposed acquisition of [Williams Partners] third-party ownership would improve the overall consolidated credit profile of Williams by reducing structural complexity and providing the means to meaningfully improve the consolidated financial leverage metrics in 2015 and 2016 through higher equity funding of growth."

Standard & Poor's Ratings Services (S&P) affirmed its "BBB" long-term corporate credit ratings and "A-2" short-term rating on Williams Partners and maintained a "stable" outlook. It also affirmed its "BB+" corporate credit and senior unsecured debt ratings on Williams and placed them on CreditWatch with "positive" implications. S&P affirmed the "BBB" corporate credit ratings on operating subsidiaries Northwest Pipeline LLC and Transco. S&P has a "stable" outlook on both companies.

"The ratings affirmation on [Williams Partners] reflects our view that the benefits to creditors of a combined Williams group are offset by higher consolidated leverage, but still lower than our downgrade trigger of forecast debt to [earnings before interest, taxes, depreciation and amortization] of 4.5x," said S&P credit analyst Nora Pickens.

"Challenging commodity prices and operating setbacks related to Geismar [olefins plant in Louisiana (see Daily GPIFeb. 10)] have led to somewhat elevated leverage at [Williams Partners], and the proposed acquisition further erodes the cushion in our forecast ratios. Pro forma for the transaction, we continue to view Williams' business risk as 'strong' given that the company's asset profile will remain largely unchanged."

Credit strengths include mainly fee-based cash flow and a dominant position in the midstream sector across a number of shale plays, S&P said.

Williams unsecured corporate debt only needs a one-notch upgrade by S&P from its "BB+" rating to achieve investment-grade status, said Pat Rau, NGI director of strategy and research. "...[W]ith that should come a significant improvement in its cost of debt, and therefore its cost of capital," he said.

The company held investment-grade status last year, but it was downgraded due to increasing reliance on cash flow from Williams Partners. "Clearly, S&P didn't like the fact that Williams was becoming too reliant on its MLPs for cash flow. Combining them under the same C-Corp. takes care of that," Rau said.

Last summer Kinder Morgan abandoned the MLP structure and consolidated its businesses into one corporate entity. CEO Rich Kinder billed the move as necessary to allow the company to raise capital to fund a buildout of infrastructure that would serve increasing production from shale plays (see Daily GPIAug. 11, 2014).

According to a Williams presentation slide on the transaction, the company will have a pro forma enterprise value of about $84 billion, putting it fourth behind Kinder Morgan ($139 billion), Enterprise Products Partners LP ($89 billion) and Enbridge (also $89 billion). Rounding out the midstream pack are TransCanada ($60 billion), Spectra Energy ($44 billion) and Magellan Midstream Partners LP ($22 billion).

Williams said the restructuring will give it "enhanced ability to sustain [its] current growth profile, even under a challenging operating environment given business mix and strong cash coverage." The company is pursuing multiple projects targeting shale gas, particularly in the Marcellus Shale region.

At the beginning of February, the merger of Williams' two MLPs (Williams Partners and Access Midstream Partners LP) became effective to form the combined Williams Partners LP (see Daily GPIOct. 27, 2014). "With the two partnerships now merged into a leading large-cap MLP focused on natural gas infrastructure, we're further positioned to take advantage of long-term natural gas demand growth for power generation, manufacturing and exports," Armstrong said earlier this year (see Daily GPIFeb. 19).

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