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5/14/2015  Williams Cos. to Acquire Its Partnership


Updated May 13, 2015 1:48 p.m. ET
The natural-gas pipeline company Williams Cos. plans to swallow its subsidiary, Williams Partners LP, making it the latest energy company to absorb a limited partnership that has grown unwieldy.
The $13.8 billion deal will provide tax benefits to Williams, but some of the partnership’s investors could be hit with an unexpected tax bill when they exchange their partnership interests for company shares.
The Williams acquisition, on the heels of Kinder Morgan Inc.’s $44 billion consolidation of its pipeline partnerships last year, shows some of the energy industry’s biggest infrastructure companies are turning away from the partnerships, which has been hugely popular with individual investors. Energy companies have used the partnership structure to raise billions of dollars in the past few years.
Under the proposed deal, Williams Cos. agreed to swap 1.115 shares for each unit of Williams Partners. In the aggregate, Williams will issue 275.4 million shares, which is about 27% of the total shares of the combined company. On Wednesday, Williams Partners shares surged nearly 23% to $58.16 and shares of Williams Cos. rose 6.2% to $53.21, both in 4 p.m. trading.
Williams Cos. set up its infrastructure partnership in 2005 to hold pipelines and natural-gas processing facilities. The partnership steadily grew and increased cash distributions to its limited partners, in large part by raising money from investors and using it to buy more assets from Williams Cos.
Like many such partnerships, Williams’s included a provision meant to align the interests of the general partner, a unit of the company, and the limited partners: as the distributions grew, so did an incentive fee to the general partner. But the sum became so large that was in danger of becoming a burden for the partnership, analysts said, making it hard for the partnership to raise new capital.
Companies that sponsor partnerships, including Williams, have at times waived or reduced these incentive payments, but experts say that is not considered a good permanent solution—parent companies and their investors aren’t compensated for giving up that cash.
Master limited partnerships aren’t subject to income taxes at the corporate level and pay hefty cash distributions to limited partners, which are usually untaxed unless investors sell the units. This type of merger triggers a forced sale and a tax bill.
The amount investors will owe can vary widely, depending on when they bought their shares and other factors. Williams hasn’t estimated what investors will owe but that amount likely will be somewhat offset by the premium they stand to receive, about 14.5% over the recent price of partnership units.
Some analysts have been expecting simplification deals, and they say the Williams merger likely won’t be the last. Last week, a smaller energy storage, processing and transportation company, Crestwood Equity Partners LP, unveiled a $3.5 billion merger to simplify its structure by taking a master-limited partnership back in house.
“If you need to be more competitive, you need to be focused on lowering cost of capital,” said Raymond James Financial Inc. energy analyst Darren Horowitz. Williams is “thinking this is the right thing to do for the next 10 to 15 years. And I agree.”
After the Williams deal closes, likely in the third quarter, the combined company will be one of the largest energy infrastructure companies. Executives of the Tulsa, Okla., company said it would be more efficient and better positioned to grow, and will be better able to keep increasing its dividend by between 10% and 15% a year through 2020.
“This strategic transaction will provide immediate benefits to Williams and Williams Partners investors,” said Chief Executive Alan Armstrong.
By buying its partnership’s assets, Williams can reset the clock on depreciation of assets, something that will translate into $2 billion in tax savings over 15 years, the company said. Becoming a regular corporation also opens the door to the company landing more institutional investors who typically are shut out from the tax advantages partnerships offer.
In February, Williams merged two master limited partnerships it controls—William Partners and Access Midstream Partners—into one giant natural-gas pipeline system under the Williams Partners name. The company has sought to increase its presence in shale formations where drillers are using new technologies to produce more oil and natural gas.