Williams Partners’ restructuring portends similar MLP moves could be on horizon, sources say

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Williams Companies’ (NYSE: WMB, BBB- /Baa3) decision to initiate a USD 12bn restructuring and augment its Master Limited Partnership status will assist the company in receiving better credit ratings and increased access to capital markets. But the move also signals the time could be ripe for other companies to consider creating MLPs, an energy consultant, credit analyst and an analyst at an asset manager told dealReporter.

“What you have now is a larger company at Williams Partners and a company with a mix of assets that provides more stability in cash flow,” said a credit analyst. “It’s a favorable transaction.” Prior to the restructuring, Williams Partners was a less diversified MLP but it now owns the remainder of the natural gas pipeline assets in the Rocky Mountains, Pacific Northwest, Gulf Coast and Eastern Seaboard that parent Williams owned.

Other natural gas companies that may be considering such a move to a broader MLP framework could include El Paso (NYSE: EP, BB /Ba3), said the energy consultant, analyst at an asset manager and a bond investor. El Paso and other companies that are facing a backlog of projects and need lower cost of capital could be considering a broader MLP, said the energy consultant. El Paso created its smaller MLP in 2007.

“Williams and El Paso were the outliers in that they were the non-MLP participants in the pipeline space,” said the bond investor, who expects El Paso may now be motivated for such a change.

El Paso initiated two sales of El Paso pipeline assets to its partnership and intends to do more, said a spokesperson at the company. “We have looked at a number of ways where we can accelerate the process of moving assets into El Paso Pipeline Partners (its MLP),” he said. “Certainly we are looking at the Williams transaction as well but we are looking at a lot of options,” he added.

Spectra Energy (NYSE: SE, BBB+ /Ba1), which also already has an existing MLP in Spectra Energy Partners, along with EQT Corp (NYSE: EQT, BBB /Baa1), which has talked about an MLP format in the past, could also be on the radar to restructure similar to Williams, said the energy consultant.

Questar (NYSE: STR, NR/NR) also has E&P assets, midstream assets and inter-state gas transportation services, which make the company a good candidate to be considering a move similar to Williams’ restructuring, added the asset manager analyst.

Spectra, Questar and EQT did not return calls seeking comment.

Master Limited Partnerships assist in lowering the cost of capital for companies since they are tax-free entities and typically the equity markets value the redistributed ownership interest in a better way after the restructuring.

Several companies in this sector who either started to form MLPs or expanded their MLPs a few years ago when capital markets were favorable stopped midstream when the credit crisis locked up the capital markets, said the credit analyst. “Now to the degree that a company could form an investment-grade MLP, that might make sense, not only for debt but for equity,” said the analyst. “The potential for these transactions has increased over the past year,” he said.

The MLP structure is also very advantageous for assisting with dividend payments, said the energy consultant. More projects can eventually be put into the MLP to make it larger, which assists in paying the company’s dividend over time, he added. Williams is probably looking to grow its MLP over a decade, which makes the company attractive to investors, he said.

Williams said on its conference call that the restructuring provides the ability to fund acquisitions with MLP capital, though the company stressed that the restructuring is not a precursor to some other deal.

Restructuring positive for credit

Williams announced the restructuring in conjunction with a tender offer for up to USD 3bn in outstanding notes from the parent company. To help fund the tender offer, the company plans to sell bonds in a private placement offering. The tender expires on the 1st of February.

Williams Partners could bring a benchmark offering consisting of 5-, 10- and 30-year bonds, said a bond investor. The health and strength of the bond markets could push the deal to come sooner than one month’s time, he added.

The deal will likely be compared with secondary bond spreads from Enterprise Products Partners (NYSE: EPD, BBB- /NR) and Kinder Morgan Energy Partners (NYSE: KMP, BBB/Baa2), he said. These companies are held in high regard currently by fixed income investors due to their tangible asset values, earnings visibility and cash flow stability, he said.

Williams Partner’s bonds could come with a coupon in the 5-6% range and at spreads of 125-150bps over treasuries, the investor said. Williams’ current debt is trading in the 150-200bp range, which enables a savings of 25-50bp on each issue by launching the bonds at the operating company level as opposed to the holding company, he added.

S&P affirmed Williams’ and its subsidiaries ratings while Fitch put Williams Partners on ratings watch positive and Moody’s is reviewing Williams Partners for an upgrade. According to the credit analyst, there will be less direct debt at Williams Companies and more debt at Williams Partners but cash flows are now subordinated. He expects their 2010 debt-to-EBITDA to be under 2x.

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