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Williams to acquire Access Midstream interests for $6 billion

By Bob Downing Published: June 16, 2014

From Williams Co. yesterday:

Williams Agrees to Acquire Global Infrastructure Partners' GP and LP Interests in Access Midstream Partners for $5.995 Billion; Plans Higher Dividend; Proposes Subsequent Merger of Access Midstream Partners and Williams Partners
6/15/2014 3:00:00 PM
 
  • Increasing Access Midstream Partners Ownership to 100% of GP and 50% of LP via Acquisition
  • Planning Williams 3Q 2014 Dividend Up 32% to $0.56, or $2.24 on an Annualized Basis; $2.46 for 2015, With Follow-on Annual Dividend Growth of Approximately 15% through 2017
  • Accelerating Transformation of Williams to Pure-Play GP Holding-Company Structure
  • Proposing Subsequent Merger of Williams Partners and Access Midstream Partners; If Consummated, Creates Industry-Leading MLP With Expected 2015 Adjusted EBITDA of Approximately $5 Billion, Strong Coverage, and 10%-12% Annual LP Distribution Growth Rate Through 2017
  • Expecting 2015 Distributions for Merged MLP to Be at Least 25% Above Access Midstream Partners' Current 2015 Distribution Guidance; Up More Than 40% vs. Current 2014 Distribution Guidance
  • Acquiring Access Midstream GP, LP Interests Not Contingent on Merger of the Two Partnerships
  • Providing Update on Geismar and Williams Partners Segment Guidance for 2014
  • Holding Investor Call at 10 a.m. EDT Monday to Discuss Acquisition, Business Plans

Williams (NYSE:WMB) today announced that it has agreed to acquire the 50 percent general partner interest and 55.1 million limited partner units in Oklahoma City-based Access Midstream Partners L.P. (NYSE:ACMP) held by Global Infrastructure Partners II ("GIP") for $5.995 billion in cash. At the close of trading on Friday, June 13, the 55.1 million LP units had a market value of $3.6 billion. Upon closing, Williams will own 100 percent of the general partner and 50 percent of the limited partner interests in Access Midstream Partners. This transaction follows Williams' acquisition of its 50 percent GP interest and 23 percent LP interest in Access Midstream Partners in December 2012. Williams expects the acquisition to close in the third quarter of 2014. Following the closing of the acquisition, Williams plans to increase its third-quarter 2014 dividend by 32 percent to $0.56 per share.

Williams also today announced a proposal to merge Williams Partners L.P. (NYSE:WPZ) with and into Access Midstream Partners.

"Today, we're announcing a series of steps designed to amplify the benefits of our existing relationship with Access Midstream Partners, an increase in our dividend and the acceleration of Williams' move to a pure-play GP holding company of two leading master limited partnerships," said Alan Armstrong, Williams' chief executive officer.

"The proposed merger of Williams Partners and Access Midstream Partners, if consummated, would create an industry-leading, large-scale MLP with substantial positions across the midstream business – spanning natural gas gathering and processing, natural gas transmission pipelines, and NGL and petchem services. Our positions in these businesses provide clearly identified growth for the foreseeable future," Armstrong said.

The Acquisition of Access Midstream Partners

The acquisition of the additional interests in Access Midstream Partners is expected to increase Williams' cash flow per share as a result of rapid growth in Access Midstream Partners' business, which drives attractive growth in its GP/IDR (incentive distribution rights) and LP cash-distributions. Williams expects the acquisition to increase fee-based revenues to more than 80 percent of its gross margin as a result of Access Midstream Partners' fee-based revenues.

Access Midstream Partners' business growth is driven by expected production increases in its portfolio of more than 8.3 million acres under dedication in major shale and unconventional producing areas, including the Marcellus, Utica, Eagle Ford, Haynesville, Barnett, Mid-continent and Niobrara.

Williams expects to close the acquisition of GIP's Access Midstream Partners interests in the third quarter this year. The closing of the acquisition is not conditioned upon the consummation of Williams' proposed merger of Williams Partners and Access Midstream Partners. Closing of the acquisition is subject only to the receipt of regulatory approvals under provisions of the Hart-Scott-Rodino Act.

"Our acquisition of the additional GP and LP interests in Access Midstream Partners represents a unique, strategic opportunity for investors, customers and the employees of both Access Midstream Partners and Williams," Armstrong continued. "We expect the acquisition to deliver immediate and future dividend growth for Williams' shareholders and to further enhance our presence in attractive growth basins. In addition, we expect the acquisition of Access Midstream Partners will fortify Williams' stable, fee-based business model and support our industry-leading dividend growth strategy."

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. The company expects to repay revolver borrowings with proceeds from the planned drop-down of its remaining NGL & Petchem Services assets and projects. In addition, Williams has entered into a backup financing commitment with respect to a $5.995 billion interim-liquidity facility with UBS Investment Bank, Barclays and Citigroup that would be available to fund the acquisition.

Williams expects to retain its investment-grade credit ratings at two of the three ratings agencies. The company expects the third agency to reduce Williams' credit rating one notch to sub-investment-grade as a result of the agency's recently announced proposed change in ratings methodology for general partners, along with Williams' plans to accelerate its move to a GP holding company and the acquisition announced today. The company expects Williams Partners to retain its current strong BBB investment-grade credit ratings.

Dividend Increases

Williams plans to increase its third-quarter 2014 dividend 32 percent to $0.56, or $2.24 on an annualized basis. In addition to the third-quarter 2014 dividend increase, Williams also is providing new dividend-growth guidance of approximately 15 percent annually – from the higher third-quarter 2014 base – through 2017 with planned dividends of approximately $1.96 in 2014, $2.46 in 2015, $2.82 in 2016, and $3.25 in 2017. The expected quarterly increases in Williams' dividend are subject to quarterly approval of the company's board of directors.

Accelerated Transformation to Pure-Play GP Holding Company

To complete Williams' transition to a pure-play GP holding company, Williams plans to accelerate the drop-down of its remaining NGL & Petchem Services assets and projects to late 2014 or early 2015. Williams expects to have invested approximately $600 million in the drop-down assets by year-end 2014. This drop-down transaction will be subject to MLP board conflicts-committee approval.

Proposed Merger of Access Midstream Partners and Williams Partners

Williams is proposing the merger of Williams Partners with and into Access Midstream Partners following the completion of its acquisition of GIP's interests in Access Midstream Partners.

Williams proposes Williams Partners merge in a unit-for-unit exchange at a ratio of 0.85 Access Midstream Partners units per Williams Partners unit. The proposal also includes an option for Williams Partners unitholders to take either a one-time special payment of $0.81 per unit, or an equivalent value of additional common units of Access Midstream Partners, to compensate for a lower expected per-unit LP cash distribution in 2015.

The proposed merger terms will be subject to negotiation, review and approval by conflicts committees of each partnership's board of directors. The conflicts committees, comprised solely of independent board members, are expected to retain legal and financial advisors. Williams expects the proposed merger to be subject to approval by Williams Partners unitholders.

If consummated, the merged MLP would be named Williams Partners L.P. and would become one of the largest and fastest-growing MLPs – with expected 2015 adjusted EBITDA of approximately $5 billion.

Williams expects the merged partnership will be a synergistic combination that is well-positioned to benefit from the ongoing energy infrastructure super-cycle. The company's operations represent a strategic, expanding footprint that connects the best supplies with the best markets.

The merged MLP would feature large-scale positions across three key components of the midstream sector, including:

  • Natural Gas Pipelines – Transco, Northwest and Gulfstream represent the nation's premier interstate pipeline network. Transco is the nation's largest and fastest-growing pipeline system.
  • Gathering and Processing – Large-scale positions in growing natural-gas supply areas in major shale and unconventional producing areas, including the Marcellus, Utica, Piceance, Four Corners, Wyoming, Eagle Ford, Haynesville, Barnett, Mid-continent and Niobrara. Additionally, the business would include oil and natural gas gathering services in the deepwater Gulf of Mexico.
  • Natural Gas Liquids and Petrochemical Services – Unique downstream presence on the Gulf Coast and in western Canada provides differentiated long-term growth.

If the merger is completed, it is anticipated that the merged partnership will be based in Tulsa, Oklahoma. Oklahoma City would become one of the partnership's major offices, which would also include Houston, Pittsburgh, Salt Lake City and Calgary.

Assuming the merger is consummated in 2014, the merged MLP is expected to have a 2015 distribution increase of at least 25 percent above Access Midstream Partners' current guidance of $2.79 per unit, with a best-in-class distribution growth rate of 10 to 12 percent through 2017 and strong coverage. Distribution coverage is estimated to be approximately 1.2x in 2015 and at or above 1.1x through 2017.

Expected Benefits of Proposed Merger to Access Midstream Partners Unitholders

  • Significantly broadened customer base, enhanced business platform, expanded technical and operational expertise, and additional opportunities to sustain long-term growth.
  • If the proposed merger is consummated in 2014:
    • Expected increase in 2015 distributions of at least 25 percent above Access Midstream Partners' current 2015 distribution guidance. This represents an increase of more than 40 percent above current 2014 distribution guidance.
    • Expected increase in 2016 distributions of at least 20 percent above Access Midstream Partners' current 2016 distribution guidance.
    • Expected best-in-class 10 to 12 percent annual distribution growth rate in each 2016 and 2017. Quarterly distributions will be subject to approval of the merged MLP's board of directors.
    • Distribution coverage is estimated to be approximately 1.2x in 2015 and at or above 1.1x through 2017.
  • Expected to improve credit ratings to investment-grade levels, which lowers debt cost and increases access to capital.
  • Expected to increase trading liquidity and broaden appeal to investors as a core MLP holding.

Expected Benefits of Proposed Merger to Williams Partners Unitholders

  • Expected increased scale and diversification with substantial operating footprint in major supply-growth basins in the United States, creating one of the most substantial growth platforms in the industry.
  • Significantly broadens customer base, enhances business platform, expands technical and operational expertise, and drives opportunities to sustain long-term growth.
  • Proposed merger exchange ratio (described above) would provide unitholders with an expected immediate premium.
  • Williams Partners unitholders will receive Access Midstream Partners units with pro-forma best-in-class distribution growth and significant cash coverage – with the combined MLP expected to benefit from attractive equity valuation.
  • Stronger credit profile expected upon integration of Access Midstream Partners' 100 percent fee-based business.

Expected Benefits of Proposed Merger to Williams Shareholders

  • Provides opportunity to enhance and streamline operations, business-development, commercial and support capabilities.
  • Further simplifies the corporate structure.
  • Aligns Williams Partners and Access Midstream Partners unitholders.
  • Expected to increase efficiency in capital allocation to growth opportunities.
  • Increased growth visibility expected to drive higher Williams valuation.

Additional Perspective on Proposed Merger

"In addition to creating a unique, large-scale MLP with one of the most substantial growth platforms in the industry and operations in top supply-growth basins, the proposed merger of Williams Partners and Access Midstream Partners is designed to deliver best-in-class distribution growth with strong coverage and investment-grade credit," Armstrong said. "We expect the proposed merger to deliver value for investors in Access Midstream Partners, Williams Partners and Williams.

"One of the truly compelling benefits of the proposed merger is the ability to incorporate the experience and expertise of Access Midstream Partners' talented employees with our own," Armstrong continued. "We have had unique visibility with respect to Access Midstream Partners' talented employees since we made our initial investment. The combination of our teams will enable us to better align resources and seize the opportunities of the more than $25 billion in potential growth investments in our business. We look forward to building on the talents and capabilities across both organizations and maintaining a sizeable presence in Oklahoma City following the merger."

Financial Guidance and Geismar Update

Williams Partners is lowering its financial guidance for 2014; financial guidance for 2015 and 2016 are unchanged. The 2014 change is primarily the result of delays in Geismar's expected in-service date and increased construction spending. The updated guidance also reflects various other changes since the company issued guidance in October 2013.

"The strength of Williams Partners' ongoing business allows us to preserve the growth reflected in its 2015 and 2016 financial guidance," Armstrong said. "We are lowering the 2014 guidance primarily as a result of delays and cost increases specific to work to bring the expanded, rebuilt Geismar facility back into service. We are now targeting late July for initiation of the startup process."

The partnership's current guidance for its 2014 earnings, distributable cash flow and capital expenditures are displayed in the following table:

Williams Partners Guidance       2014    
Amounts are in millions except coverage ratio.   Low   Mid   High
DCF attributable to partnership ops. (1)   $2,000   $2,100   $2,200
             
Total Cash Distribution (2)   $2,340   $2,370   $2,400
             
Cash Distribution Coverage Ratio (1)   .85x   .89x   .92x
             
Adjusted Segment Profit (1):   $2,050   $2,150   $2,250
             
Adjusted Segment Profit + DD&A (1):   $2,945   $3,070   $3,195
             
Growth Capital Expenditures   $3,370   $3,655   $3,940

(1) Distributable Cash Flow, Cash Distribution Coverage Ratio, Adjusted Segment Profit and
Adjusted Segment Profit + DD&A are non-GAAP measures. Reconciliations to the most
relevant measures included in GAAP are attached to this news release.

(2) The cash distributions in guidance are on an accrual basis and reflect an approximate
annual growth rate in limited partner distributions of 5-7% for 2014.

 

The Geismar plant rebuild and expansion projects are targeted for initiation of startup in late July. Williams Partners' financial guidance assumes ethylene sales commencing in mid-August. The delay from the previous expectation of startup initiation in late June resulted from lower than planned construction labor productivity and other factors on both the rebuild and expansion projects. The Geismar expansion project capital spending is expected to increase to $715 million, up $65 million from previous guidance, primarily as a result of such delays.

Additionally, risks associated with the expected full recovery of $500 million in insurance proceeds related to the Geismar incident could result in full-year 2014 distributable cash flow that is below the new guidance range. In May, the insurers approved $50 million of the most recent claim-payment request of $200 million. Upon receipt of such $50 million, expected in June, the total insurance receipts to date will be $225 million. The insurers continue to evaluate Williams Partners' claims and have recently raised questions around key assumptions involving our business-interruption claim. As a result, the insurers have elected to make a partial payment pending further assessment of these issues. Williams Partners continues to work with insurers in support of all claims, as submitted, and is vigorously pursuing full payment.

Williams is maintaining its consolidated financial guidance for 2014 to 2016 within the existing ranges it has previously published – excluding the effects of the acquisition and other plans it announced today. The company expects to update its guidance on July 30, concurrent with its second-quarter 2014 earnings release, to include the effect of the acquisition as well as Williams Partners' updated segment guidance. Following closing of the purchase of the GIP interests, Williams expects to consolidate its investment in Access Midstream Partners for purposes of financial reporting. In connection with this transaction, Williams expects to receive tax benefits consistent with those recognized by Williams from its December 2012 initial investment in Access Midstream Partners.

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Ohio Department of Natural Resources' Division of Oil and Gas Resources Management State agency Web site.

ODNR Division of Oil and Gas Resources Management. State drilling permits. List is updated weekly.

ODNR Division of Geological Survey.

Ohio Environmental Protection Agency.

Ohio State University Extension.

Ohio Farm Bureau.

Ohio Oil and Gas Association, a Granville-based group that represents 1,500 Ohio energy-related companies.

Ohio Oil & Gas Energy Education Program.

Energy In Depth, a trade group.

Marcellus and Utica Shale Resource Center by Ohio law firm Bricker & Eckler.

Utica Shale, a compilation of Utica shale activities.

Landman Report Card, a site that looks at companies involved in gas and oil leases.FracFocus, a compilation of chemicals used in fracking individual wells as reported voluntarily by some drillers.

Chesapeake Energy Corp,the Oklahoma-based firm is the No. 1 driller in Ohio.

Rig Count Interactive Map by Baker Hughes, an energy services company.

Shale Sheet Fracking, a Youngstown Vindicator blog.

National Geographic's The Great Shale Rush.

The Ohio Environmental Council, a statewide eco-group based in Columbus.

Buckeye Forest Council.

Earthjustice, a national eco-group.

Stop Fracking Ohio.

People's Oil and Gas Collaborative-Ohio, a grass-roots group in Northeast Ohio.

Concerned Citizens of Medina County, a grass-roots group.

No Frack Ohio, a Columbus-based grass-roots group.

Fracking: Gas Drilling's Environmental Threat by ProPublica, an online journalism site.

Penn State Marcellus Center.

Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.

Allegheny Front, environmental public radio for Western Pennsylvania.