Williams Cos. Inc. is merging nearly all of its interstate natural gas pipeline and midstream affiliates into Williams Partners LP to create one of the largest master limited partnerships (MLP) in the country, the Tulsa-based energy company said last week.
Worth an estimated $12 billion, the partnership would control nearly 15,000 miles of U.S. gas pipelines, including stakes in Northwest Pipeline GP, Transcontinental Gas Pipe Line (Transco) and Gulfstream Natural Gas System. For its pipeline contributions, the corporate parent would receive about $10 billion. Williams would own about 80% of the partnership, up from its current 24%.
"This is a transformational transaction," CEO Steve Malcolm told investors on a conference call. "The goal of this strategic restructuring is simple: drive more value-creating growth across our natural gas businesses. As a large, diversified MLP with expected investment-grade credit ratings, Williams Partners will have significantly enhanced access to capital sources. It will be able to self-fund our gas pipeline and midstream growth -- both organically and through third-party acquisitions."
With the partnership funding the gas pipeline and midstream businesses, "we will have additional capital at the parent-company level to allocate to our exploration and production business...The enhanced opportunities for growth across all of our businesses will also help bolster the country's critically important natural gas infrastructure -- from production and processing in key growth basins to end-user delivery."
The gas pipeline assets to be contributed to the partnership include 100% of Transco, 65% of Northwest Pipeline and 24.5% of Gulfstream. Williams also would contribute its general partner and limited partner interests in Williams Pipeline Partners, which owns the remaining 35% of Northwest Pipeline.
Midstream assets going to Williams Partners include operations in the Rocky Mountain and Gulf Coast regions, as well as a recently added business in Pennsylvania's Marcellus Shale (see NGI, Jan. 11; June 29, 2009). The assets encompass seven processing trains totaling 2.3 Bcf/d of capacity in the Rockies and four processing trains on the Gulf Coast.
The Gulf Coast processing trains are integrated with five major deepwater gas and oil pipeline systems and two production handling platforms to serve producers in the deepwater Gulf of Mexico. The midstream assets also would include various equity investments in domestic processing and fractionation assets.
Once the transaction is completed, Williams would continue to hold a "handful" of pipeline and midstream assets that were not eligible or not yet appropriate to drop into the partnership. The assets that would remain under Williams include its Canadian pipelines, a quarter interest in Gulfstream and its olefins business.
The move would give Williams' exploration and production (E&P) business more visibility and allow investors to more easily differentiate between the corporation's businesses and partnerships, Malcolm said.
"We know exactly how we're going to grow," he said. The company also wouldn't be pressured to decide whether to spend money for E&P or for pipelines, he noted.
"When the price environment was attractive, we were growing our production at a 20-plus percent annual rate," Malcolm said. "Assuming an attractive price environment, you will see Williams wanting to create those very high growth rates we had a few years ago."
Phil Wright, who helms the Williams gas pipeline business, told customers in an e-mail Tuesday that the interstate pipeline assets would "continue to be operated by Williams employees and your contacts at the company will not change as a result of this announcement. Additionally, this transaction will have no impact on your contractual relationship with the company or your day-to-day interaction with Williams employees."
The transaction is expected to close by the end of March. Williams Partners, said Malcolm, likely would be the third largest MLP "in terms of size," behind Kinder Morgan Energy Partners LP and Enterprise Products Partners, LP.
"This simplification and acceleration of the master limited partnership strategy should help establish a clear and transparent valuation for the pipe and midstream assets, and as a result highlight the arguable 40% discount of its exploration and production assets," BMO Capital Markets analysts said in a note to clients.
Darren Horowitz, an analyst with Raymond James & Associates Inc. called the restructuring a "positive across the board...The consolidation gives [Williams Partners] greater access to capital at subsequently lower prices," which would allow the company to fund large projects and make acquisitions more easily.
The three major credit ratings agencies said the move was a positive. Fitch Ratings placed the company and the partnership under a "Rating Watch Positive" and said it may upgrade its ratings once the transaction is completed. The "outlook remains positive," said Standard and Poor's Ratings Services (S&P).
"We believe the restructuring transaction will increase the size and diversity of Williams Partners, improve its cash flow stability, and should better position it to access the debt and equity markets," S&P analysts said. "With improved access to the capital markets, Williams Partners will likely be able to fund future growth activities without solely relying on asset dropdowns from Williams."
Moody's Investors Services placed the debt ratings under review for a possible upgrade.
"This large asset contribution from Williams gives Williams Partners the size, business risk mix and leverage profile of a 'Baa3' rated MLP," said Moody's Vice President Pete Speer. "Although this reduces the asset base that directly supports Williams' creditors, the planned reduction in debt at Williams combined with it retaining a substantial E&P business and control over Williams Partners supported the affirmation of Williams' 'Baa3' rating."
In related news, a unit of Williams said Friday it has executed precedent agreements for a proposed Transco expansion to provide an additional 142,000 Dth of incremental firm natural gas transportation capacity to serve growing markets in the Mid-Atlantic region by November 2012. Williams held an open season last summer for the expansion.
The Mid-Atlantic Connector expansion would provide service on Transco from an interconnection with East Tennessee Natural Gas in Rockingham County, NC, to delivery points as far north as Maryland. Other supply points in the path of the project include interconnects with Columbia Gas Transmission, Dominion Transmission and Dominion Cove Point.
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