Tag Archives: WMB

Merger Mania Sweeps Through the Energy Sector, Dramatically Altering the Landscape

Natural gas pipeline giant Williams Companies (NYSE:WMB) announced today that it agreed to acquire the rest of its master limited partnership (MLP) Williams Partners (NYSE:WPZ) that it didn’t already own in a $10.5 billion deal. Not to be outdone, Canadian energy infrastructure giant Enbridge (NYSE:ENB) made an offer to acquire its namesake MLP Enbridge Energy Partners (NYSE:EEP), along with the rest of its publicly traded entities, including Spectra Energy Partners (NYSE:SEP). These transactions have big implications not only for investors in these entities but for those who own other pipeline companies, too.

Details on the deals

Williams Companies agreed to acquire the 26% of Williams Partners that it doesn’t hold in a stock-for-unit transaction. Under the terms of the deal, investors in Williams Partners will receive 1.494 shares of Williams Companies for each unit they own, which represents a 6.4% premium to yesterday’s closing price. The transaction, which Williams hinted was in the works, will simplify its organizational structure, improve its credit profile, and increase dividend coverage, making the company’s 5%-yielding payout even more sustainable.

Two people shaking hands superimposed on an energy facility in the background.

Image source: Getty Images.

Enbridge, meanwhile, offered to buy all its sponsored vehicles, which include MLPs Enbridge Energy Partners and Spectra Energy Partners, as well as Enbridge Energy Management (NYSE:EEQ) and Enbridge Income Fund Holdings (TSX:ENF). Under the terms of thismegadeal, the company would swap its shares for the equity of these various entities at a ratio equivalent to yesterday’s closing price, implying no merger premium. Overall, Enbridge would issue 272 million new shares valued at 11.4 billion Canadian dollars ($8.9 billion). This proposed transaction would simplify Enbridge’s structure, improve its credit profile, and increase retained cash flow to fund growth. The deal would help support Enbridge’s strategic plan to grow its 6.4%-yielding dividend at a 10% annual rate through 2020.

What’s driving these mergers

While several factorsserved as catalysts for these deals, the main one is a policy change by the Federal Energy Regulatory Commission (FERC) that will have a significant impact on MLPs going forward. In March, FERC revised a long-standing ruling that allowed MLPs to collect income taxes on top of the rates they charged shippers on certain pipelines after a court ruling found that FERC “failed to demonstrate there was no double recovery of income tax costs.” That rule change hit MLPs operating these pipelines hard, including Enbridge Energy Partners, which expected a $125 million hit to its revenue this year. However, since both Enbridge and Williams are corporations, they can retain the income tax allowance on those pipelines by acquiring their MLPs.

Enbridge noted that the FERC ruling and subsequent “market reactions across the MLP landscape” had “challenged the stand-alone viability of Spectra Energy Partners, Enbridge Energy Partners, and Enbridge Energy Management as reliable and cost-effective sources of capital to support Enbridge’s growth.” Because of that, the company could no longer drop down assets into those entities and raise cash to finance growth. The company also noted that Enbridge Income Fund had “lost its cost of capital advantage and is no longer an effective funding vehicle.” Thus, it made sense to bring all these vehicles back in-house and create one stronger company.

A person in a hard hat walking by a pipeline with a blue sky on the other end.

Image source: Getty Images.

There are more deals in the pipeline

These transactions will likely spur others to follow suit. Energy Transfer Equityhas already made it clear that it will merge with its MLP Energy Transfer Partnersas soon as it gets the green light from credit rating agencies that the combined entity can maintain an investment-grade credit rating. Meanwhile, TransCanadawarned that its MLP, TC Pipelines, isn’t a viable funding vehicle in light of the FERC ruling. Because of that, TransCanada might follow Enbridge and Williams in rolling up its MLP.

However, given the distressed nature of these MLPs, it’s unlikely that investors will receive much, if any, merger premium. So there’s no sense in buying them in hopes of earning a quick return. Instead, investors need to take the long-term view and consider companies like Williams and Enbridge, which are becoming much stronger, more sustainable dividend-growth stories with the buyouts of their MLPs.

4 Things Williams Companies Inc.'s CEO Wants You to Know About What's Coming Down the Pipeli

Williams Companies (NYSE:WMB) was off to a great start in 2018 thanks to the growth of its majority-owned master limited partnership,Williams Partners (NYSE:WPZ). There’s plenty more where that came from, which was clear from the comments of CEO Alan Armstrong on the accompanying quarterly conference call. While he didn’t fill in every detail about what lies ahead, he made sure investors knew that the company’s future looks bright.

1. Our growth engine is just getting revved up

Armstrong started off the call by saying that “the quarter was right on plan.” Because of that, Williams “continue[s] to remain on course and anticipate[s] significant growth as we look toward the second half of this year and into 2019.” One of the drivers of that view is the upcoming completion of its Atlantic Sunrise expansion project. The CEO noted that it would provide “about $105 million per quarter of incremental revenue” for its key Transco Pipeline and would be a “significant contributor to the growth we anticipate in the latter half of this year.”

A pipeline under construction.

Image source: Getty Images.

2. We’re focused on delivering high-quality growth

One thing Armstrong made clear is that Williams isn’t growing to build an energy infrastructure empire. Instead, the company has put together a “strategy of focusing on connecting low-cost natural gas supplies to the fastest-growing demand centers,” which has “allowed the organization to leverage our solid foundation of advantaged positions.” According to the CEO, “We are most excited about what our intense focus on strategy will produce for us in the long term. This focus has allowed us to continue to identify, develop, and contract for new opportunities at higher than industry average returns, and this is going to drive improvement in ROCE (return on capital employed) and shareholder value for many years to come.”

In other words, by focusing on what it does best, William’s growth strategy is earning it higher returns on new projects, which is on pace to create significant value for investors going forward.

3. Stay tuned; we have a lot more projects coming down the pipeline

Williams Partners is putting the final touches on its current expansion phase, which should drive healthy earnings growth through 2019. In fact, it believes these high-return projects will provide it with the cash flow to increase its distribution to investors at a 5% to 7% annual rate through at least the next year, fueling 10% to 15% dividend growth at Williams.

Armstrong hinted on the call that the company has plenty of growth still up ahead. However, he wanted to wait until the upcoming Analyst Day in mid-May to unveil those projects. The CEO did say that the company has an “extensive list of attractive projects spanning our operating areas that are currently in execution or under development.” Because of that, Williams will have “great transparency toward predictable growth not just in the short term, but very much in the long term” and is “really excited to see the way our pipeline for growth is continuing to fill in.”

4. We’re leaving all our options on the table

Another thing Williams Companies’ CEO isn’t yet ready to reveal is what the company plans to do with its majority-owned MLP. Several analysts on the call asked if the company planned to join a growing number of its peers by rolling up the MLP back into Williams. That’s something Williams attempted to do a few years ago, but it abandoned the pursuit after agreeing to an ill-fated merger with Energy Transfer Equity.

While acquiring the rest of the units of Williams Partners it doesn’t already own is still an option going forward, Armstrong stated on the call that “there certainly are many other structures to look at.” He emphasized that the company isn’t in any hurry to decide what it might do, saying, “We’re not going to pin ourselves down as to when exactly we’re going to answer this question at this point.” While this uncertainty could weigh on the company’s valuation in the near term, Williams wants to make sure it has evaluated every option so that it can choose the best one, even if that means keeping the status quo.

An income stock for the long term

The overarching theme of Armstrong’s comments on the call is that Williams Companies has significant growth ahead of it. While he was a bit light on some details, he did hint that the company has a boatload of new projects in development and could eventually make a structural change with Williams Partners. As the company provides those details, they should further cement the fact that Williams Companies can increase its 5%-yielding dividend at a healthy pace for years to come, which is what makes it a solid stock for income seekers to hold.