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Williams Companies and Access Midstream merger—big impact on MLPs

Williams Companies and Access Midstream merger—big impact on MLPs (Part 1 of 5)

Why Williams Companies acquires interests in Access Midstream

Williams Companies and Access Midstream Partners

On June 16, 2014, Williams Companies Inc. (WMB) disclosed that it agreed to acquire Access Midstream Partners’ (ACMP) 50% general partner (or GP) interest and 55.1 million limited partner (or LP) units for $5.99 billion. Through the acquisition, WMB would purchase the GP and LP units held by ACMP’s general partner Global Infrastructure Partners (GIP) funds. The acquisition will likely give WMB the full GP ownership and 50% LP interest in the ACMP—a master limited partnership (or MLP). Williams had previously acquired a 50% stake in the Access general partner and 23% of the Access limited partner ownership in December, 2012.

Partnership StructureEnlarge Graph

The proposed merger would accelerate the transformation of Williams Companies to pure-play GP holding-company structure. Investors may note that MLPs are managed by the GP, which often has a 2% economic stake in the enterprise (the limited partner, or LP, unitholders have the other 98%). The board of directors also sits at the GP level.

Financing the deal

Williams plans to fund approximately half of the $5.995 billion acquisition with equity and the remainder with a combination of long-term debt, revolver borrowings, and cash on hand.

Why MLP structure

The proposed merger between WMB and ACMP would create one of the largest companies in the midstream energy sectors. The combined company would have earnings before interest, taxes, depreciation, and amortization (or EBITDA) of ~5 billion, and a 10%–12% annual LP distribution growth rate. Investors seeking yield generating instruments usually find them in MLPs with their distribution feature. MLPs often to distribute out most of their excess cash flow in the form of distributions (similar to dividends) to unit holders.

Dividend to increase for the new entity

DividendEnlarge Graph

In 3Q14, WMB is planning to increase dividend from the last declared dividend of $0.42 by 32% to $0.56, or $2.24 on an annualized basis and $2.24 annualized for 2015. Subsequently, it would also increase dividend by 15% annually through 2017.

According to WMB’s disclosure, the new entity would offer an attractive dividend for 2015, which is expected to be at least 25% higher than ACMP’s 2015 distribution guidance and 40% higher than ACMP’s 2014 guidance. Previously, ACMP declared distribution guidance of $2.30 for 2014.

CompsEnlarge Graph

Williams expects the transaction to close in 3Q14. The proposed transaction is subject to regulatory approval.

Access Midstream Partners L.P. (ACMP) is a MLP operating in the midstream energy space. Currently, Williams Companies (WMB) and Global Infrastructure Partners jointly own the general partner of ACMP. ACMP is part of the Alerian MLP ETF (AMLP) and WMB is part of the Global X MLP & Energy Infrastructure ETF (MLPX) and the Alerian Energy Infrastructure ETF (ENFR).

The Realist Discussions

  • Eddie Hagler

    So what would happen if the bottom fell out of the LP market. Aren’t the prices for petroleum based energy sources currently inflated and due for a downturn… especially if Mideast energy producers lower their prices as a competitive move against South American producers?