Williams Companies Acquires Access Midstream Partners, Raises Q3 Dividend 32%, Announces 15% Annual Dividend Increases, Transitions to Pure Play GP Holding Co.
On June 15, 2014, Williams Companies (WMB) announced plans to acquire Access Midstream Partners LP (ACMP) for $5.995 billion in cash. The acquisition will enhance Williams’ operations in growing shale plays, fortify its fee-based revenues and support dividend growth. Williams also announced plans to raise its Q3 2014 dividend by 32% to $0.56 per unit ($2.24 annualized), and by 10% in 2015 to $2.46. Thereafter, Williams plans to raise dividends 15% annually through 2017.
The acquisition comes four weeks after activist investors Keith Meister of Corvex and Eric Mandelblatt of Soroban joined Williams Companies’ Board of Directors.
Access has the nation’s largest gathering and processing (G&P) assets with 6,400 miles of natural gas gathering pipelines in key shale plays, and throughput of 3.8 billion cubic feet per day. Access’ contracts are 100% fee-based, with zero exposure to natural gas prices. This generates stable and predictable revenues which are ideal for unitholder distributions.
Access has grown EBITDA from $76 million in Q1 2011 to $250 million in Q1 2014, and projects EBITDA of $1.4 – $1.6 billion by 2016; and grown distributions 15% annually, with a coverage ratio of 1.4x payout.
With Access, Williams will further strengthen its leadership in the Marcellus shale play where it owns and operates the Transco pipeline, one of the America’s largest natural gas transportation systems. Through Access, Williams will also increase its presence in other high-growth plays such as Barnett and Eagle Ford where increased fracking has caused a boom in shale gas production and created a spurt in demand for natural gas gathering, processing and transportation assets – creating an ongoing energy infrastructure super cycle.
With 100% IDRs and 50% LP units, Williams will also receive higher cash distributions from Access and pay out higher dividends to its shareholders.
Williams’ shares jumped 22% on the announcement from $47.18 (on Friday 6/13/2014) to $57.66 (on Friday 6/20/2014). Credit Suisse raised its WMB share price target to $65 (from $50) while Jefferies upgraded shares to a BUY on expectations that dividends will grow more than projected by the company.
WMB: 34% Quarterly, 17% Annualized Increase in Dividends
With production set to rise across Access’ acreage and with resulting cash flow, Williams plans to increase Q3 2014 dividends by 34% to $0.56 ($2.24 annualized) for a dividend yield of 3.9%. Williams expects to pay annual dividends of $1.96, $2.46, $2.82 and $3.25 for 2014 through 2017, with annual increases of about 15%.
Acquisition Raises Williams’ GP Stake to 100%, LP Stake to 50% in Access
Access Midstream Partners owns over 8.3 million acres in leading shale and unconventional plays such as Barnett, Eagle Ford, Haynesville, Marcellus, Mid-Continent, Niobrara and Utica, with planned production increases expected to drive revenue growth.
Williams, which already owned a 50% General Partner and 23% Limited Partner interest in Access, acquired the remaining 50% GP and 27% LP stake from Global Infrastructure Partners for $5.995 billion in cash. The 27% LP stake included 55.1 million units with a market value of $3.6 billion as of June 13, 2014.
With Access, Williams will become a leading provider of reliable large-scale midstream assets, with assets in all major natural gas supply basins across the U.S., and be better positioned to capitalize on America’s growing natural gas supply and ethane cracking businesses. With this added scale, Williams will be ranked #1 or #2 in transportation, gathering and processing in its markets.
After the acquisition closes, in Q3 2014, Williams will hold 100% GP and 50% LP interest in Access, with public unitholders owning the remaining 50% LP stake.
Williams will benefit from Access’ rapid business growth and attractive GP IDR and LP distributions. And, with Access, Williams expects stable long-term fee-based revenues to account for over 80% of its gross margin.
Williams also expects tax benefits from the acquisition, similar to when it made the December 2012 investment in Access.
The acquisition will be funded through a roughly
50-50 combination of newly issued equity and revolver borrowings, long-term debt and cash. In the near future, Williams plans to dropdown certain petrochemical and NGL assets to its MLP subsidiaries and plans to use dropdown proceeds to repay its credit revolver.
On June 16, 2014, Williams commenced a secondary public offering of 53 million shares priced at $57 each to raise about $3 billion, with proceeds to be used to partly fund the acquisition.
Williams expects to retain its BBB investment-grade rating with two agencies while a third agency plans to drop Williams one notch on its move to a pure-play GP and on added debt.
Williams Cos. Transition to Pure-Play GP
Around late 2014 to early 2015, after the acquisition closes, Williams Companies plans to drop-down its remaining petrochemical and NGL assets to its MLP subsidiaries. Thereafter, Williams will be a pure-play GP holding company with no direct operational involvement. Williams expects to receive proceeds of about $600 million from the drop-down transaction and use this to pay off credit facility borrowings.
Plans to Merge Access and Williams Partners
After it closes the acquisition, Williams plans to merge Access Midstream Partners (ACMP) with Williams Partners (WPZ) – to streamline GP management, reduce overlapping expenses, align ACMP and WPZ unitholders and increase capital efficiency for up to $25 billion in growth opportunities. Under the proposed merger, 0.85 ACMP units will be exchangeable for 1 WPZ unit.
The merged entity will have a stronger customer base, expanded operational and technical expertise, improved credit ratings (with Access’ 100% fee-based business), lower cost of capital and increased trading liquidity – and will create a substantial growth platform.
Under the merged entity, ACMP unitholders will receive 25% higher distributions per unit than before but WPZ unitholders will see a drop. To compensate for this drop in distribution, Williams Partners’ unitholders could take a one-time payout of $0.81 per unit or receive an equivalent number of additional Access units.
Merged entity distributions are expected to grow at 10-12% annually through 2017, with strong distribution coverage of 1.1x or higher through 2017.
The merged entity will be called Williams Partners LP and is expected to have Adjusted EBITDA of about $5 billion in 2015, making it one of the largest, fastest-growing energy-sector MLPs. Williams will now be up there with Enterprise Products Partners (EPD) and Kinder Morgan Energy Partners (KMP), which are both in the $5 billion Adjusted EBITDA range.
With cost savings and synergies, the merger should improve margins of the combined entity and increase cash flow. The merged entity will be headquartered in Tulsa, Oklahoma.
The merged entity will focus on three key midstream sectors – it will own America’s largest natural gas pipeline system (with Transco, Gulfstream and Northwest), large-scale high-growth gathering and processing (G&P) infrastructure in major shale and unconventional plays, and offer NGL and petrochemical services at prime Western Canada and Gulf Coast locations.
Williams Partners (WPZ) Lowers 2014 Guidance, Maintains 2015, 2016 Outlook
Williams Partners’ expects $65 million in cost overruns tied to a one-month delay in service resumption at its renovated Geismar facility to late July 2014 on lower labor productivity than planned. Ethylene sales are set to resume around mid-August. Williams has so far collected only $225 million of $500 million in business-interruption insurance claims on Geismar, with the insurance company questioning certain assumptions.
As a result, Williams lowered 2014 guidance with distributable cash flow in the $2 billion to $2.2 billion range, with coverage ratios of 0.85x to 0.92x.
Merged MLP Projections for 2015
In 2015, the merged entity expects to generate $4.7 – $5.2 billion in Adjusted EBITDA with $3.4 – $3.8 billion from WPZ and $1.25 – $1.35 billion from ACMP.
This acquisition further consolidates Williams’ position as a leading large-scale player in the natural gas midstream segment. The acquisition will deliver stronger cash distributions from Access and enable higher dividends for WMB shareholders, with more stable fee-based revenues. The subsequent merger of Access and Williams Partners is another positive that will again unleash a wave of cost savings, and scale and capital efficiencies, to help the merged entity take on about $25 billion in growth opportunities. So this acquisition is essentially a key step in dominating growth opportunities with scale economies. Critics do lament the increased exposure to natural gas price volatility but this acquisition is a bold move that will benefit Williams’ stakeholders.
Williams Companies Consolidated Q1 2014 Results
For its first quarter ended March 31, 2014, Williams Companies reported total revenues of $1.7 billion and net income of $140 million ($0.20 per share), down from $162 million in the year-ago quarter due to $86 million in writeoffs related to the Bluegrass Pipeline project and lower NGL margins. Adjusted income was up 25% to $190 million ($0.28 per share) on a $63 million increase in Williams Partners’ fee-based revenues and a $63 million in business-interruption insurance recoveries expected on its Geismar olefins facility but offset by $38 million on lower NGL margins.
In Q1, Williams added a fractionator at its Moundsville, West Virginia, plant, virtually completed the deepwater Keathley Canyon pipeline, prepared Gulfstar One for commissioning and made significant progress on renovations at Geismar. Williams continued to develop expansion and new projects at its Transco pipeline network for intra-state natural gas transport and LNG export facilities. Williams suspended capital investments on the Bluegrass Pipeline (for NGL transport from the northeast to the Gulf Coast) to secure customer commitments before making additional investments.
Williams has three reporting divisions. Williams Partners reported an increase in segment profit to $503 million, Williams NGL and Petchem Services reported a loss due to $95 million in Bluegrass related charges and Access contributed $6 million with $21 million in equity earnings offset by $15 million in noncash amortization charges.
At quarter end, Williams (consolidated) had cash of $1.06 billion, investments of $4.5 billion, PP&E of $26.5 billion, with total assets of $28.3 billion. Long-term debt was $12.1 billion and total equity was $8.7 billion.
At $57.66 (as of 6/20/2014), shares trade at rich valuations that reflect organic growth prospects and the recently announced Access acquisition.
With the acquisition of Access Midstream Partners, Williams has vaulted firmly into the big league, while fortifying its base of stable fee-based revenues and strengthening its G&P presence, which complements its leading pipeline segment. Shareholders have been well rewarded through capital appreciation and dividend growth. Williams is uniquely positioned to benefit from America’s rapidly growing energy sector and shares have significant upside despite valuation concerns. Investors should look at pullbacks as buying opportunities.