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Why the merger is an advantage for Williams and Access Midstream

Avik Chowdhury

Williams Companies and Access Midstream merger—big impact on MLPs (Part 5 of 5)

(Continued from Part 4)

Merger creates shareholder value for ACMP and WPZ

The proposed merger of Williams Partners (WPZ) and Access Midstream Partners (ACMP) would significantly widen the customer base on an enhanced business platform. By blending the technical and operating expertise of both the companies, it would create additional opportunities for a long-term growth.

Who will be the customers?

For ACMP, Chesapeake Energy Corporation (CHK) is a key customer in the natural gas producing regions of the Utica, Eagle Ford, and Marcellus shales– the fastest growing regions in the U.S. Together, these regions accounted for 44% of the revenues generated from ACMP’s fixed-fee agreements. Investments in these liquids-rich regions generated approximately 50% of the company’s earnings before interest, taxes, depreciation, and amortization (or EBITDA) for 2013.

However, ACMP has reduced its dependence on CHK in terms of volume in the past two years. ACMP has put in place a strategy to continually diversify away from CHK by sourcing 50% of its gas volume from other customers by 2015. WMB’s interstate natural gas pipelines have a broad mix of customers, including local natural gas distribution companies, municipal utilities, direct industrial users, and electric power generators. The natural gas gathering and processing segment had 220 customers in 2013. However, the top five customers accounted for ~50% of the segment’s revenues.

Distribution to exceed ACMP’s guidance

The proposed merger is expected to be implemented in 2014. The merged master limited partnership (or MLP) is expected to increase distributions in 2015 of at least 25% above Access Midstream Partners’ current 2015 distribution guidance. This represents an increase of more than 40% above current 2014 distribution guidance. For 2016 and 2017, it would have a distribution growth of 10%–12%. This would translate into distribution coverage of approximately 1.2x in 2015 and at least 1.1x through 2017.

Through the merger, the WPZ unitholders would receive ACMP units with higher distribution growth and significant cash coverage. WMB expects distribution coverage ratio to fall to ~1.2x in 2016 from ~1.3x in 2014. In 1Q14, ACMP had a distribution coverage ratio of ~1.4x, and is expected to increase as it increases its distributable cash flows and EBITDA through several growth projects.

The merged entity is also expected to have a credit rating of investment grade BBB, as enjoyed by WMB. This would lead to lower debt cost and increased access to capital. Higher credit rating implies higher credit worthiness or repayment capability of the issuer, which implies lower credit risk. This translates into lower cost of debt. Also, companies with higher credit rating will find it easier to raise capital because of their improved credit worthiness. As of December 31, 2013, WPZ had long-term debt of $9.05 billion, while long-term debt for ACMP was $3.24 billion.

Why WMB shareholders benefit

Williams Companies Inc. (WMB), the general partner owner of the new entity would benefit from a streamlined operation of ACMP-WPZ merger. There would be a common platform for business development and synergy from commercial and support capabilities, since WPZ and ACMP are in the similar line of business. Currently, the holding structure of WMB in WPZ and ACMP is quite complex, which is expected to get simplified in the new structure. ACMP-WPZ merged would also benefit from asset drop-downs of WMB, which would improve distributions for WMB shareholders. WMB would find it more efficient to allocate capital to growth projects of both the companies under the common structure. It’s also expected that a large MLP would have increased visibility in the investor community, which would drive the valuation of the company higher.

Williams Partners L.P. (WPZ) is a MLP operating in the midstream energy space. Currently, Williams Companies (WMB) owns the general partner interests in WPZ. WMB is also a general partner in Access Midstream Partners L.P. (ACMP). ACMP is part of the Alerian MLP ETF (AMLP) and WMB is part of the Global X MLP & Energy Infrastructure ETF (MLPX).


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