Williams Hits a Gusher with Clever Financial Engineering

Late last year, the natural-gas sector got a jolt from Exxon's (XOM) $41 purchase of XTO (XTO). Since then, we've seen other big-ticket deals, including Total SA's (TOT) $2.25 billion joint venture for Chesapeake Energy's (CHK) Barnett properties. This week, the trend continued with Williams Cos. (WMB), which is undergoing a $12 billion restructuring of its various holdings. While the deal is fairly complicated, it will nonetheless result in a much simpler structure for investors to value the assets.
Williams Cos. will contribute its pipeline assets from the Northeast, Gulf Coast and Rocky Mountains to Williams Partners L.P. (WPZ), which will then merge with Williams Pipeline Partners L.P. (WMZ). The combination will produce one of the largest master limited partnerships (MLPs) in the energy business, with profits of roughly $2 billion and 14,000 miles of natural gas pipelines. The scale and an investment-grade crediting rating will also give the new company greater access to capital, allowing more organic growth and acquisitions.

This strategy has proven successful with other diversified energy operators like Kinder Morgan (KMP). MLPs offer investors tax-free distributions, which is especially attractive in the current low interest-rate environment. In fact, Williams Partners says it will increase its quarterly payouts by 3.5%.

Williams Cos. stands to benefit greatly from the partnership: it will get $10 billion, consisting of $3.5 billion in cash, $2 billion in assumed debt and 203 million units of Williams Partners, boosting the equity stake in the company from 24% to 80%. At the same time, Williams Cos. can now focus on its natural gas exploration ambitions, which will be key for long-term growth.

Initially, this looks like slick financial engineering that will offer questionable results. However, the reorganization of this deal is brilliant: Williams Partners will have the kind of structure that investors want and will gain more capital to build the business. Meanwhile, Williams Cos. will be able to cater to growth investors and will also have the resources to pursue its business model (finding natural gas is definitely expensive, especially as the sources are usually in tough environments).

On the street, response to the partnership was enthusiastic: in yesterday's trading, Williams Cos.'s shares were up 8%, while Williams Partners posted a 18% gain and Williams Pipeline increased 16%.

Interestingly enough, there is also a rumor that El Paso Corp. (EP) will also transfer its pipeline holdings to its MLP holding, El Paso Pipeline Partners LP (EPB). In light of the investor response to Williams Cos.' moves, it's a good bet El Paso is thinking hard about this option.
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