Why Williams Companies’ acquisition of Access Midstream is solid
Solid fee-based structure of the new entity
Williams Companies (WMB) has a growing fee-based business model. Fee-based business is projected to grow by 57% through 2016 and account for at least 75% of WMB’s gross margin by 2016. In WMB’s business model, the ratio of regulated fees is set to drop to 36% in 2016 from 43% in in 2013. Unregulated fee based revenues would increase to 41% in 2016 from 31% in 2013 in WMB’s portfolio. Total gross margin for WMB is expected to increase 50% to $5.7 billion from $3.8 billion in 2013 as a result of various growth projects. The major projects already undertaken by WMB include the Ohio Valley Midstream and Susquehanna Supply Hub in Williams Partners (WPZ) Northeast for a total of $3.23 billion. These projects are scheduled to be completed by 2015. Other projects under review are Atlantic Sunrise and Leidy SE in WPZ Atlantic or WPZ Gulf region, Geismar plant expansion and Canadian Ethane Recovery in its natural gas liquids (or NGLs) business, and Parachute Plant Expansion in WPZ West.
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Access Midstream Partners’ (ACMP) business model includes fixed-fee contract structure and long-term gas gathering agreements. This structure helps ACMP mitigate its exposure to direct commodity price risk and provides with long-term cash flow stability. The company has entered into long-term gas gathering agreements with Chesapeake Energy Corporation (CHK) and other producer customers like Total, S.A., Anadarko, Statoil ASA, Shell, and ExxonMobil which include minimum volume commitments, periodic fee redeterminations, and other contractual provisions. Therefore, the merged entity will benefit from long-term fixed-fee contracts of ACMP and WMB.
Cash flows to improve
The acquisition is expected to increase Williams’ cash flow per share as a result of rapid growth in Access Midstream Partners’ business. This would drive significant growth in its general partner (or GP) and IDR and limited partner (or LP) cash distributions, as WMB would own 100% of the GP units and 50% of the LP units in ACMP. ACMP has various long-term gas gathering agreements with its customers. This structure helps ACMP mitigate its exposure to direct commodity price risk and provides it with long-term cash flow stability. The company has entered into long-term gas gathering agreements with Chesapeake Energy Corporation (CHK) and other producer customers like Total, S.A., Anadarko, Statoil ASA, Shell, and ExxonMobil which include minimum volume commitments, periodic fee redeterminations, and other contractual provisions.
In 2014 and 2015, ACMP projected increases of 22% and 19% in earnings before interest, taxes, depreciation, and amortization (or EBITDA). In the new entity this would translate into higher EBITDA and higher cash flow per unit. According to WMB’s disclosure, the new entity would offer a dividend, 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.
Going forward, WMB expects growth to happen primarily from the capacity expansion at the gas gathering system and at the fractionation and de-ethanization facility at the Ohio Valley Midstream and the gas gathering system at the Susquehanna Supply Hub in WPZ Northeast. It has invested $3.23 billion in these projects. These projects are scheduled to be completed by 2015. ACMP has committed significant capital expenditure in the gas-rich Eagle Ford and Utica shales in the past two years. In the Eagle Ford, the company has plans to invest $1.6 billion in the Eagle Ford facilities by 2015. In the Utica, it plans to invest $1.8 billion by 2015. The merged company is expected to increase its dividend based on higher cash flows from these growth projects.
Registration exemption benefits
In connection with this acquisition, Williams expects to receive tax benefits consistent with those recognized from the December, 2012. In 2012, Williams purchased 22.6% LP interests in ACMP for a total consideration of $1.8 billion. These issuances were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. Investors may note all companies, domestic and foreign, are required to file registration statements and other forms with the Securities Exchange Commission (or SEC). By exempting some qualified offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.
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).