Williams is jumping on the master limited partnership (MLP) bandwagon with the announcement last week that it plans to create an MLP to own gas pipeline assets. The company also said it will repurchase up to $1 billion of its common shares.

MLPs for midstream as well as exploration and production assets have gained significant traction in the last couple of years. Last week FERC noted the rise of pipeline MLPs when it made a rule change in how pipeline return on equity is calculated (see related story).

The initial asset in the MLP will be an interest in Williams’ Northwest Pipeline, a 3,900-mile bi-directional transmission system that accesses gas supplies in the Rocky Mountains, Canada and the San Juan Basin and serves markets in the Pacific Northwest. Williams will continue to own the remaining interest and will continue to operate Northwest.

“In the past 12 months alone, Williams shareholders have enjoyed a nearly 50% increase in the value of their shares — more than double the performance of the S&P 500 during the same time period and outperforming our peer group,” said CEO Steve Malcolm. “The increase reflects our strategy of actively managing Williams’ portfolio of businesses to best optimize the company’s assets. With the agreed sale of our power business and plans for a new pipeline MLP, Williams is seizing the opportunity to build on that success.”

A Williams subsidiary will serve as the general partner of the pipeline MLP. Williams serves in a like capacity with midstream-focused MLP Williams Partners LP, which completed its initial public offering (IPO) in August 2005.

In the period since Williams Partners’ IPO through Thursday, unitholders have realized a 137% total return on their investment, the company said.

“The new gas pipeline MLP is complementary to our existing, very successful midstream MLP,” Malcolm said. “We remain focused on our commitment to drive growth in Williams Partners through a combination of drop-downs, third-party acquisitions and organic growth.”

Williams’ gas pipeline business includes Northwest Pipeline, a 50% interest in Gulfstream Pipeline and the wholly owned Transco system.

The company also said its board authorized the repurchase of up to $1 billion of the company’s common stock. The repurchase program has no expiration date. As of June 30, Williams had approximately 600 million shares outstanding. The program will be funded with cash on hand.

Fitch Ratings affirmed its debt and issuer default ratings of Williams following the share buyback announcement. “While recognizing that the program directs cash away from further debt reduction or investment in the company’s operations as well as the company’s significant investment plans, Fitch also considered [Williams’] significant liquidity position as unrestricted cash on hand at March 31, 2007 totaled approximately $1.8 billion,” the ratings agency said.

Equity proceeds from the MLP transaction will be used for previously announced growth projects and for general corporate purposes, Williams said. MLP debt is consolidated and reported on Williams’ balance sheet; to the extent transactions are partially capitalized with debt proceeds, the company anticipates retiring an approximate amount of Williams debt so that consolidated balances remain constant.

The Williams announcement comes one day after the Federal Energy Regulatory Commission (FERC) made what its chairman called a “significant policy change” in the calculation of pipeline return on equity in deference to the rise of MLPs in the pipeline sector. Last Thursday FERC issued a draft policy statement that would allow the use of MLPs in proxy groups to determine oil and natural gas pipelines’ returns on equity for ratemaking purposes (see related story).

Further MLP formation activity was also seen recently at Devon Energy Corp., which said last Wednesday that its board approved a plan to form an MLP to own a minority interest in its U.S. onshore marketing and midstream business, including natural gas gathering and processing assets in Texas, Oklahoma, Wyoming and Montana (see related story).

Southern Union Co. is preparing a midstream MLP, expected to debut in September (see NGI, March 5). El Paso Corp. has been planning to launch by the end of the year an MLP that would hold many, if not all, of its gas pipeline assets (see NGI, May 14; Feb. 26).

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