-=Williams Partners (WPZ) to be acquired by Williams (WMB)

Williams Partners to be acquired by Williams (WMB) in a $10.5 bln all stock transaction 

The co's announced an agreement under which Williams will acquire all of the outstanding public common units of Williams Partners in an all stock-for-unit transaction at a 1.494 ratio of Williams common shares per unit of Williams Partners. The transaction is valued at $10.5 billion; representing a premium to the public unitholders of 6.4 percent based on closing prices on May 16, 2018, or a premium of 13.6 percent to the unaffected closing prices on March 15, 2018.

• In aggregate, assuming a 1.494 exchange ratio, Williams will issue approximately 382.5 million shares in connection with the proposed transaction, representing approximately 31.6 percent of the total shares outstanding of the combined entity.
• Expected benefits of transaction
  • Immediately accretive to cash available for dividends for Williams
  • Retention of significant Distributable Cash Flow coverage (of approximately 1.7x in 2019) allowing excess cash to be re-invested in attractive capital projects

Master Limited Partnerships (MLPs) tumble on FERC’s revised income tax policy

Master Limited Partnerships (AMLP, AMJ) fall to 52 week low after the Federal Energy Regulatory Commission announces it no longer will allow MLPs to recover an income tax allowance in the cost of service 

• MLP weakness: EEP -14.66% TCP -11.46% BPL -8.42% ETE -8.11% ETP -7.05% SNMP -7.37% NGL -6.19% SEP -6.28% NS -5.61% MMP -6.33% DM -6.69% PAGP -6.15% WPZ -5.55% VLP -6.04% BWP -4.96% SHLX -5.50% ANDX -5.28% DCP -4.58%
• By descending market cap: EPD -4.02% WPZ -5.51% MPLX -3.08%ETP -6.60% SEP -6.16% PAA -4.70% ETE -7.82% MMP-6.31% CQP-2.78% ANDX-5.19% WGP-1.38% WES-2.42% APO-1.40% BPL-8.63% EQGP-3.88% PSXP-4.70% ENBL-4.26% BEP-0.72% SHLX-5.46% 
• This is weighing on the Energy sector (XLE-0.6%)

 

In an unprecedented move, FERC (the Federal Energy Regulatory Commission) revised its income tax policy for MLPs. MLPs, which aren’t taxed at the corporate level and which operate as pass-through entities, allocate their income to investors. Investors are taxed on their share of the net income. To compensate investors for the income tax burden, MLPs have been receiving an income tax allowance from customers on FERC-regulated pipelines.

Who's Protected from FERC's Revised Income Tax Policy?

No harm to C-corps

Midstream companies such as Kinder Morgan (KMI), Targa Resource (TRGP), and ONEOK (OKE) are taxed as C-corps, so the revised policy doesn’t apply to them. C-corps reacted negatively to the news, but they recovered by the end of the trading session. Williams Companies (WMB) and Enbridge Inc. (ENB), which are also C-corps, were an exception due to their GP-LP model and dependence on limited partnerships for their distribution income.

Non-regulated pipelines

Non-regulated pipelines—such as gathering pipelines and other intrastate pipelines—aren’t regulated by FERC, so they wouldn’t see much impact from the revised tax policy. The gathering MLPs include Antero Midstream Partners (AM), Cone Midstream Partners (CNNX), and EQT Midstream Partners (EQM).

Other midstream activities

Other midstream activities—such as natural gas processing, NGLs fractionation, and fuel terminaling and storage—shouldn’t have any impact on the revised policy, as prices in these cases aren’t regulated by FERC. They include MPLX LP (MPLX), Western Gas Partners (WES), and DCP Midstream (DCP).

However, most midstream MLPs have some exposure to interstate transportation and the sell-off across the sector.

Other value chain

MLPs that aren’t involved in midstream activities—such as upstream MLPs, downstream MLPs, frac-sand producers, catalytic conversion, and midstream services—should see no impact from the revised policy. They include Legacy Reserves (LGCY), Hi-Crush Partners (HCLP), CSI Compressco LP (CCLP), and CVR Refining (CVRR).