Pipeline giants Williams and Enbridge Inc. on Thursday announced they are simplifying their corporate structures in reaction to a FERC ruling in March that removed master limited partnership (MLP) tax benefits. Natural gas exporter Cheniere Energy Inc. also said it wants to acquire its partnership.
Tulsa-based Williams plans to acquire all of the outstanding common units of Williams Partners LP (WPZ) in a stock-for-unit transaction valued at $10.5 billion. The transaction represents a premium to public unitholders of 6.4% based on closing prices Wednesday (May 16).
WPZ, whose operations touch an estimated 30% of U.S. natural gas supply, owns and operates more than 33,000 miles of pipelines onshore and in the Gulf of Mexico, which include Transcontinental Gas Pipeline Co. LLC, aka Transco, along with Northwest Pipeline LP and Gulfstream, in which it owns a half-stake. Williams owns about 74% of the partnership.
Williams had indicated the potential for a corporate restructuring in response to the Federal Energy Regulatory Commission’s revised policy statement issued in mid-March that reversed the Commission’s 2005 income tax policy. The previous policy permitted MLP interstate oil and natural gas pipelines to maintain an income tax allowance in cost-of-service rates.
Commissioners said the revised policy was in response to a decision of the U.S. Court of Appeals for the District of Columbia Circuit in United Airlines v. FERC (827 F.3d 122 [D.C. Cir. 2016]). The court held that the Commission failed to demonstrate that there was no double-recovery of income tax costs when permitting an MLP to recover both an income tax allowance and a return on equity determined by the discounted cash flow methodology.
Former Commissioner Marc Spitzer, in an interview with NGI earlier this month, said FERC had fumbled its response.
Since the FERC ruling was issued, Williams and WPZ had considered a “number of alternatives,” and determined that simplifying would be in the two entities’ best interests.
The decision “will maintain the income tax allowance that is included in our regulated pipeline’s cost-of-service rates,” Williams CEO Alan Armstrong said. “This transaction also simplifies our corporate structure, streamlines governance and maintains investment-grade credit ratings.
“The transaction will allow Williams to directly invest the excess coverage in our expanding portfolio of large-scale, fully contracted infrastructure projects,” which should drive earnings growth, “without the need to issue equity for the broad base of projects currently included in our guidance.
“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. As a fast-growing, investment grade C-Corp with the best natural gas infrastructure assets in the sector, we are confident this combined entity will provide a compelling investment opportunity to a broader range of investors.”
The merger is expected to close this fall, subject to shareholder approval. Once completed, the partnership would become a Williams subsidiary.
“From the perspective of Williams' consolidated credit profile, the acquisition of the remaining 26% of WPZ in an all equity transaction would improve the overall credit profile of Williams,” said Moody’s Investors Service’s Pete Speer, senior vice president. “The acquisition will reduce structural complexity, avoid potentially lower revenues at the company's regulated pipelines under the recent FERC ruling, and provide cash tax benefits to Williams.
“The combined entity will have strong dividend coverage metrics and the corresponding ability to internally fund a meaningful portion of its growth capital expenditures. This will result in less reliance on equity markets to fund growth capital and correspondingly sounder liquidity.”
Enbridge Takeover Valued At C$11.4 Billion
Calgary-basd Enbridge, which owns substantial U.S. pipeline infrastructure, also plans to consolidate into a single listed entity in stock deals valued at C$11.4 billion ($8.94 billion) based on Wednesday’s closing price on the Toronto Stock Exchange.
Subsidiaries Enbridge plans to roll in are Spectra Energy Partners LP (SEC), Enbridge Energy Partners LP (EEP), Enbridge Energy Management LLC (EEQ) and Enbridge Income Fund Holdings Inc. (ENF).
Last December, Enbridge outlined a 2018-2020 plan that emphasized several priorities, one of which was to assess the potential streamlining and simplification of its corporate structure.
“The recent FERC income tax allowance policy reversal and the regulatory rate impact from the U.S. Tax Cuts and Jobs Act, as well as the market reactions across the MLP landscape, have challenged the standalone viability of SEP, EEP and EEQ as reliable and cost effective sources of capital to support Enbridge's growth,” management said. “Similarly, ENF has lost its cost of capital advantage and is no longer an effective funding vehicle.
“After evaluating options to mitigate the effects of these recent actions and the resulting capital markets' response, and to advance Enbridge's priority to simplify and streamline its corporate structure, Enbridge believes the proposals are strategically and economically attractive to each of the sponsored vehicles and to Enbridge shareholders.”
Mirroring Williams’ comments, Enbridge said the newly changed FERC tax policy “is highly unfavorable to unitholders and is no longer advantageous for Enbridge or the U.S. MLPs. The combination of this changed policy and the negative capital markets reaction has impaired the MLP structure for Enbridge's interstate pipelines.”
Without restructuring, “and in light of the challenging capital markets conditions and the resulting impact on MLP cash flows, Enbridge's view is that EEP and SEP will face the cessation of distribution growth, and compromised distribution outlook to unitholders as early as 2019. Similarly, Enbridge's view is that ENF's uncompetitive cost of capital will inhibit future dividend growth.”
Assets held by the sponsored vehicles are already managed and operated by Enbridge's U.S. and Canadian subsidiaries and consolidated for financial purposes, management noted. “Therefore, a broad simplification is achieved by eliminating four publicly traded vehicles while increasing the company's ownership in its core businesses and further enhancing its industry-leading, low-risk profile.”
During a conference call to discuss the revamp, Enbridge CEO Al Monaco said, “For a good portion of their history, our sponsored vehicles provided an attractive alternative source of funding and were effective in optimizing our overall cost of capital. In short, they were at very good way to maximize the value of our assets and grow our pipeline business.”
However, even after “our supportive and streamlining actions recently, it's clear that these advantages no longer exist.” Since rolling out a plan to streamline the operations last year, “we've seen a further weakening in the MLP market generally and in our case, being prohibitive to access capital.”
The rollup should be a positive “from a credit and funding perspective, as 100% of the cash flow is generated by our assets will be kept in the family and not paid out in third party distributions,” Monaco added. “And we also retain cash flow to support capital investment.”
Cheniere Eyes Stock-For-Stock Takeover
Meanwhile, Houston-based Cheniere said Thursday it plans to acquire the publicly held shares of Cheniere Energy Partners LP Holdings LLC in a stock-for-stock exchange valued at $28.24/share, also based on Wednesday’s closing price.
Cheniere owns about 92% of the partnership. Based on the offer, the partnership would be valued at about $6.54 billion.
Few details were provided, as no final agreement has been reached, said the liquefied natural gas operator.
“The proposed transaction is subject to the negotiation and execution of a definitive agreement,” Cheniere management said. No timetable was provided as to when the transaction could be completed.